Discover some additional tips for finding the best long-term investments

The best long-term investments in your portfolio all have one thing in common: They give you reason to believe they might be worth holding on to indefinitely.

Most of these stocks have an established business and a history of sales gains, plus some earnings, if not dividends. To put it more simply: these stocks have a clear business plan that seems to be working.

The best long-term investments will recover more quickly from market downturns

Of course, stocks like these will still suffer in a deep market downturn, like the one we went through in 2008/2009. They may also suffer in the shallower, shorter downturns that come along more often. But most recover quickly when the market revives, as it always does. In fact, stocks like these may lead the inevitable market recovery.

These are the kind of stocks we put in our clients’ portfolios. Though we think they are worth holding on to indefinitely, we keep an open mind. After all, they are subject to the usual risks. Competitors can overtake them. Expected contracts can fall through. They can lose key employees, run into union or regulatory problems, and so on.

Of course, nobody can predict the future. We’ll change our view and sell some as time passes. We’ll give up on some way too early, and hang on to others way too long. But if you focus on stocks like these, you improve your odds. The best of the bunch will offset your losses and leave you with highly satisfactory long-term returns.

Two tips for getting better returns with the best long-term investments

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 equity 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.

Assessments and judgments for choosing the best long-term investments

Diversify geographically: One of the worst things you can do is invest so that your portfolio would suffer a great deal due to a localized downturn in any one city, state or province. Ideally, your portfolio should give you exposure to much of the North American economy, plus substantial international exposure, if only through North American multinationals.

Develop a clear idea of how much risk you are willing to accept, through good times and bad: For example, some investors become more aggressive as the market rises, and more conservative as the market falls. The problem here is that all market trends, up or down, eventually reach a turning point. If you take on more risk as the market rises, you’ll wind up owning your riskiest portfolio just when the market is near a peak. That’s when risky stocks can do their greatest harm to your net worth.

The best long-term investments don’t overindulge in aggressive investments

Aggressive stocks can give you bigger gains than more conservative stocks. But they also expose you to a greater risk of loss. That’s why we recommend limiting your aggressive holdings to no more than, say, 30% of your overall portfolio.

Ultimately, the percentage of your portfolio that should be held in either conservative or aggressive investments depends on your personal circumstances and risk tolerance—and your own growth investing strategy. An investor with a longer time horizon or without the need for current income from a portfolio can invest more money in aggressive stocks.

What are the best long-term investments you’re holding? What tips do you recommend for finding these kinds of investments? Share your thoughts with us in the comments.