Long-term investment stocks to energize your investment gains

Most successful investors will hold a blend of growth stocks and some value stocks at any given time, depending on where they discover the best opportunities. Value stocks are stocks trading lower than their fundamentals suggest. They are perceived as undervalued, and have the potential to rise.

Although growth stocks can be highly volatile, they often make good long-term investment stocks. They may be well-known stars or quiet gems, but they do share one common attribute—they continue to grow at higher-than-average rates within their industries, or within the market as a whole.

Growth stocks as long-term investment stocks

For most investors in growth stocks, you should limit your growth investment holdings to, say, 30% of your overall portfolio. When looking for growth stocks that have the potential for higher returns, always focus on investment quality first.

Here are some tips for selecting growth stocks as long-term investment stocks:

• Always review the balance sheets of the growth stocks you want to invest in.
• While you are looking at balance sheets, look for hidden assets like real estate. At times, the hidden assets in a company’s real estate can even come to exceed the market value of its stock.
• When investing in more speculative growth stocks, use our “sell-half” rule. This says that if a stock you own has doubled, you should sell half so you get back your initial stake.
• If you are too slow to sell speculative stocks in your growth portfolio, your profits, and even your principal, can evaporate all too quickly.
• Try to find growth stocks that have ownership of strong brand names and an impeccable reputation. Customers keep coming back to these businesses, and will try their new products.

2 tips for getting better returns with long-term investment stocks

Financial incentives can influence people negatively: Financial incentives have an enormous impact on the beliefs of otherwise honest people, particularly when it comes to what they are willing to say in order to spur you to buy something. If you fail to spot these conflicts of interest, it could be very damaging to your portfolio.

We’re not just talking about stockbrokers. As the saying goes, never depend on your barber to tell you that it’s too soon for you to get your hair cut. To make those long-term investment returns really matter, you need to know the rules of the game. Money motivates people to sell all kinds of financial products that are set up to take your money.

Compound interest is king: Compound interest—earning interest on interest—can have an enormous ballooning effect on the value of an investment over the long term, and lift the overall returns on your portfolio.

This applies to equity investments like stocks, as well as to fixed-return, interest-paying investments like bonds. When you earn a return on past returns (including dividends), the value of your investment can multiply. Instead of rising at a steady rate, the number of dollars in your portfolio will grow at an accelerating rate.

Bonus Tip: Mutual fund investing: How to identify mutual funds that hold long-term investment stocks

Beware of buying vaguely described mutual funds. Get rid of mutual funds that show wide disparities between the mutual fund’s portfolio and the investments that the sales literature describes.

Eliminate anything with “asset allocation” in the name. If the fund’s name includes the term, it means the fund’s managers or sponsors feel they can enhance returns and/or reduce the risks of their mutual funds by switching back and forth among stocks, bonds and cash equivalents, often using a so-called “black box,” a computer program that makes trading decisions based on a pre-selected set of rules for interpreting financial statistics.

Avoid buying mutual funds with a lot of dead weight. When a fund’s portfolio shows page after page of obscure speculative stocks, particularly thinly traded ones or recent new issues, you can be exposed to a concealed, but very serious, risk.

Eliminate anything with “balanced” in the name. Mutual funds that have the term in their names own stocks and bonds.

Avoid buying mutual funds that trade in derivatives. In the long run, derivatives trading is what mathematicians refer to as a “negative-sum game”: one player’s gain is another’s loss, minus commissions and other costs. In the end, trading derivatives costs you money.

Avoid buying mutual funds with anonymous managers. The trouble here is that the brains of the mutual fund may leave, and investors would never know it until they saw the drop in their mutual fund’s performance.

Do you have recommendations for other long-term investment stocks? Share your suggestions with us in the comments.