Long-term stocks can be a building block of your portfolio if you don’t impulsively sell them off

Finding and holding long-term stocks is one of the main investment goals of TSI Network. While it’s certainly a strategy to buy and sell stocks for short-term gains, we feel that top-quality long term stocks will gradually accumulate stock market profits over decades. And because you’re investing for a long period of time, short market fluctuations have very little effect on long-term gains—so it’s a less stressful investment strategy.

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Compound interest—earning interest on interest—can have an enormous ballooning effect on the value of an investment over the long-term

Compound interest can be considered one of the best long-term investment strategies. This tip is especially important for young investors to learn. Benefits apply to both stock and 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.

At the same time, pay attention to steady drains on your capital, even seemingly small ones—like high brokerage commissions. If you’re losing (or missing out on a profit of) even 1% a year, it can have an enormous draining effect on your investments over a decade or two.

Protect yourself from impulsive selling when investing in long-term stocks

One big risk of volatile markets is that they can spur you to make impulsive sell decisions. They lead some investors to sell “at the bottom”—that is, to sell some if not all their best holdings right around the time when the market hits what will turn out to be its low.

In hindsight, it may seem that the best way to deal with this risk is to sell when a market downturn is just getting started. That would be the best way—if only it were possible! But nobody can foresee how long a drop in prices will last, nor how far down it will go. You can find lots of systems and signals and gurus that guessed right, once or several times in a row. Eventually, though, they all guess wrong. One wrong guess can create losses that far outweigh gains from a series of lucky guesses.

One problem for unsuccessful investors is that they live by the idea that a stock is “worth” only what it will fetch if you have to sell immediately. You’ll sometimes hear them say things like, “I lost $50,000 last Thursday,” even if they didn’t sell anything.

Successful investors protect themselves from impulsive sell decisions by maintaining a sense of perspective. They recognize that stock markets are volatile.

More important, they understand that the value of a stock is equal to the total of all dividends and other distributions it will ever pay out, plus the price you get when you sell it, discounted to the present by a discount rate that reflects the uncertainties involved.

In other words, the value of a stock depends on the total of all the money you will ever get from owning it. Why else would you buy it? However, you have to discount that total, because of the length of time you have to wait to get the money. The right discount rate will depend on the risk or uncertainty of receiving the payments, and on the general level of interest rates.

6 habits of long-term stocks

• Insider actions dictate integrity
• Regression to the mean is inevitable
• Investment long shots will almost always cost you money
• Financial incentives can influence people negatively
• Equities win in health economies
• Some markets are inherently unpredictable

Don’t be discouraged if your long-term stocks go through a long “dead money” period

Even the best stocks go through periods where they move sideways for a period of months or longer, producing no capital gains for you (stock brokers often refer to these stocks as “dead money”). However, this doesn’t necessarily mean there’s anything wrong with the stock or the company. In fact, many stocks qualify as “dead money” much of the time; their biggest gains occur in unpredictable spurts. Risk is relatively low in a high-quality stock that is going through a “dead-money” phase, by the way. But profits can be spectacular when it comes back to life.

Rather than trying to stay out of so-called “dead-money” stocks, it’s better to focus on building a portfolio that can produce a growing stream of dividends for you, plus long-term gains.

When your long-term stocks begin to dive, do you panic? Tell us about the last time you made an impulsive investing decision that hurt your portfolio.