The best drug stocks will have an established portfolio of drugs without near-term generic competition, plus a number of other up-and-coming drugs in the pipeline.

We mostly stayed out of drug stocks for much of the past two decades. But we now feel the environment for drug stock investment has improved a great deal. In fact, we expect to see many great investment opportunities in drug stocks throughout the 2020s.

You could say this is related to COVID-19, but it was going to happen anyway, due to regulatory and research developments that were already underway. COVID-19 simply gave it a boost.

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Find out what to look for in the best drug stocks so you can be aware of and account for their unique risks

We do think the drug industry will enjoy great success in this coming decade. But, due to the nature of the business, results will vary widely and unpredictably from one drug company to another. Drug stocks suffer from high volatility and fierce competition. It still takes a long time and massive investment to invent and develop a drug and win regulatory approval, which is not guaranteed. In addition, successful drugs can quickly lose market share if a better alternative appears.

Meanwhile, the aging of the boomers will create demand for drugs, and some drug firms will benefit from treating new diseases. But there are several drawbacks to drug companies that you should keep in mind if you are thinking of investing in them.

In particular, drug firms need to continue to spend heavily to create new drugs and spend even more to gain regulatory approval. Even then, they only get to profit for a limited time before patents run out and generic products appear. Then, too, their research spending may lead to dead ends, rather than new drugs that fill a need and can overcome the regulatory hurdles.

In addition, demand for effective drugs can evaporate overnight, long before the patent expires, if more effective drugs come along.

Looking for the best drug stocks? Consider as well medical equipment suppliers for your portfolio.

If you want to invest in the best drug stocks as part of a Successful Investor portfolio, we think you should focus on those that have an established portfolio of drugs without near-term generic competition and a number of other up-and-coming drugs in the pipeline. All the better if they have access to expanding markets such as China, India and Latin America.

Meanwhile, demand for medical equipment tends to grow, or at least hold steady, regardless of swings in the overall economy. Many of these firms also get recurring revenue, mainly from long-time customers. They also face little competition from generic products, and stand to gain from the continued aging of baby boomers.

While the best drug stocks can be good additions to a portfolio, other fields of medicine and health care can offer a number of other stocks we recommend that meet our Successful Investor criteria. For example, we like health care stocks with recurring revenue, which can come from the sale of lab supplies, maintenance on equipment or other such sources.

Invest in a medical devices ETF that goes beyond drug company stocks for more secure profits in your portfolio

As mentioned, there’s little doubt that the developing world’s aging population will continue to spend more on medical services for years to come. Medical device makers are well positioned to capture a share of that increased spending. Technological changes that continually spur new product development will also pay off. In turn, investors in the industry’s leading companies stand to benefit from growing demand.

We still feel that investors will profit the most with a well-balanced portfolio of high-quality individual stocks, but ETFs can also play a role in a portfolio. And medical-device ETFs aim to provide a diversified and low-fee way for investors to participate in this expanding industry beyond one or two leading stocks. Becton Dickinson (BDX) and Baxter International Inc. (BAX) are two examples.

Let our three-part Successful Investor approach help you add quality medical and pharma stocks to your portfolio

• Hold mostly high-quality, dividend-paying stocks.
• Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
• Downplay or stay out of stocks in the broker/media limelight.

Bonus Tip: Here’s how we think “hormesis” will impact your holdings

“Hormesis” refers to a beneficial biological effect (such as improved health, better stress tolerance, faster growth or longer life) that comes from low doses of an agent that is toxic if not deadly when taken in higher doses. This “hormetic factor” basically means that while too much stress is bad for your health, low amounts of certain stresses can be good for you.

Exercise is an undisputed example of good stress that delivers a hormetic benefit. The right kind and amount of exercise opens up tiny rips and tears in your muscles. As your body repairs the damage, it builds up your muscle mass. This leaves your body in better shape than before the exercise, which in turn brings a variety of health benefits.

In contrast, too much exercise—continually overexerting yourself, say—is apt to lead to an early death. Your body just can’t repair the damage fast enough.

Sunlight can also yield hormetic benefits. Too much sunlight can inflict a painful sunburn, and may lead to skin cancer. But a little sunlight helps your body create vitamin D, which is essential for health. It can help fight serious bacterial illnesses such as tuberculosis.

It also seemed to help recovery chances of victims of the great Spanish flu of 1918. Studies of that pandemic show that improvised open-air hospitals had a better survival rate than nearby facilities enclosed in buildings.

I bring this up now because I suspect the hormetic factor will have a beneficial impact on the market outlook, and on the performance of your investment portfolio in the rest of the year and beyond.

How has the pandemic changed your interest in drug stocks as an investment?