Adding long-term stocks to buy and hold as part of a well-diversified portfolio is the best way to beat the market over time. Learn how to do this successfully with these guidelines

Long-term investment strategies aren’t built by aiming to make a fast dollar, or profiting from inside information. They are built over time, and most importantly, by learning how not to repeat the market mistakes of the past.

Here’s how investors can build that wealth with the best long-term stocks to buy and hold.

Spotting the best long-term stocks to buy and hold lets you profit from long-term growth in the economy

Often, the decision to abandon the buy-and-hold strategy seems to crop up when the market is down or at least in a state of turmoil that leaves investors uncertain.

For decades—as long as I’ve been involved with the stock market—some brokers have claimed that they favour the “buy and hold” investing strategy in principle, except when the market was so treacherous and unpredictable that their clients had to indulge in short-term trading, options or whatever to make any money.

Brokers have powerful financial incentives to recommend this kind of switch. The alternate investing methods they recommend involve higher fees. These fees leave their clients far less likely to make significant profits, but they virtually guarantee that the broker’s income will go way up.

Investors generally resist this switch. They recognize that you can’t predict market swings, but you can profit from long-term growth in the economy, and from the wealth creation that takes place in well-established companies. However, investors become more receptive to the idea in the late stages of a market downturn, when the “alternative strategies” have beaten “buy and hold” for a year or two.

The funny thing about all this is that “the traditional buy-and-hold strategy” is written about much more than it is practiced by most investors.

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Look to blue chips as some of the best long-term stocks to buy and hold for maximum gains

A company with a long-term record of paying dividends is generally one that is most deserving of the “blue chip” label in its traditional sense. Dividends, after all, are much more stable than earnings projections. More importantly, dividends are impossible to fake—either the company has the cash to pay them or it doesn’t.

The best blue chips offer both capital gains growth potential and regular dividend income. Be aware, though, that investors should avoid judging a company based solely on its dividend yield.

That’s because a high yield can sometimes be a danger sign rather than a bargain. For example, a dividend-paying stock’s yield could be high simply due to the fact its share price has dropped sharply (because you use a company’s share price to calculate yield) in anticipation of a dividend cut.

Consider a mix of value and growth investing strategies while looking for long-term stocks to buy and hold 

The core of the long-term value investing approach is identifying well-financed companies that are established in their businesses and have a history of earnings and dividends. They are likely to survive any economic setback that comes along, and thrive anew when prosperity returns, as it inevitably does.

When you look for stocks that are undervalued, it’s best to focus on shares of quality companies that have a consistent history of sales and earnings, as well as a strong hold on a growing clientele.

Academic studies suggest that on average, value investing produces better results than growth investing. But these studies mostly look back on what would have happened in a particular historical period, if you followed a particular set of rules. Most distinguish between growth and income investing by looking at average p/e’s (per-share price-to-per-share earnings ratios). They assume high p/e’s are a marker for growth stocks and low p/e’s a marker of value stocks. As any serious value or growth investor can tell you, it’s more complicated than that.

All in all if you balance and diversify your portfolio as we recommend, it should include both growth and value selections. In both areas, however, you should avoid extremes.

Enjoy the benefits of compounding when you invest in long-term stocks to buy and hold

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 compounding principle applies to equity investments like stocks, not just to fixed-return, interest-paying investments like bonds. When you earn a return on past returns (including reinvested dividends), the value of your investment will grow more quickly. Instead of rising at a steady rate, the number of dollars in your portfolio will grow at an accelerating rate.

At the same time, you need to pay attention to steady drains on the capital in your portfolio, even seemingly small ones—like brokerage commissions or other fees.

Additionally, you can’t expect to earn an outsized return on a risky investment in your portfolio indefinitely. Instead, focus on making steady gains over time with mostly conservative, dividend-paying stocks. 

Use our three-part Successful Investor approach to find long-term stocks to buy and hold

• 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.

Some investors don’t look for long-term stocks to buy and hold because they feel it ties up too much capital. What are your thoughts on this? 

Do you stick to a buy-and-hold strategy or do you prefer regular trading with your stocks?