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How to Pick Stocks for Long-Term Investing


Choosing stocks for long-term investing requires a strategic approach based on analysis and informed decision-making. Unlike short-term trading, which aims to capitalize on market fluctuations, long-term investing emphasizes patience and a thorough understanding of a company’s fundamentals and broader economic conditions. Investing for the long haul allows investors to build a diversified portfolio aimed at sustainable growth and financial stability.

If you need help selecting stocks, managing your portfolio or aligning your strategy with your financial goals, connect with a financial advisor today. 

What Is Long-Term Investing?

At its core, long-term investing focuses on buying and holding assets such as stocks, bonds, mutual funds and real estate with the intention of benefiting from their appreciation over time. The objective is to take advantage of the power of compounding, where the returns earned on investments are reinvested to generate additional returns. Over the course of years and decades, this compounding effect can significantly increase the value of the initial investment.

This strategy reduces the impact of short-term market fluctuations and leverages the historical trend of market growth over time. By focusing on the underlying value and performance of investments, long-term investors aim to achieve steady and reliable returns.

Here are some key characteristics of long-term investing:

  • Patience and discipline: Long-term investors must be patient and disciplined, as this strategy requires a commitment to staying invested through market ups and downs.
  • Lower transaction costs: With fewer buy and sell transactions compared to short-term trading, long-term investing often results in lower transaction costs and capital gains taxes.
  • Focus on fundamentals: Long-term investors tend to focus on the fundamental performance of their investments, such as company earnings, rather than short-term price movements.

On the other hand, short-term investing involves holding investments for a relatively brief period, ranging from a few months to a couple of years. Short-term investors often seek to capitalize on market trends or specific events that may impact the value of their investments in the near term.

Another option to consider would be trading, which is a much more active strategy where investors buy and sell assets frequently, often within days or even minutes. Traders aim to profit from short-term price movements and typically use technical analysis and market timing to make their decisions.

Assess the Fundamentals of a Company

A woman does some research on a company's fundamentals from her kitchen.

Fundamental analysis is a key strategy in evaluating a company’s financial health and long-term potential. This approach involves examining financial statements, management quality, market position and industry conditions. Investors use fundamental analysis to determine a stock’s intrinsic value, seeking to identify undervalued opportunities. 

This method can provide a comprehensive understanding of a company’s worth beyond market price fluctuations, making it an essential tool for long-term investment decisions.

When an investor assesses the fundamentals of a company, they may examine its price-to-earnings ratio, earnings growth, dividends and the return on equity they could potentially receive. 

P/E ratio

The price-to-earnings (P/E) ratio represents the ratio of a company’s current share price to its earnings per share (EPS). Essentially, the P/E ratio helps investors determine whether a stock is overvalued, undervalued, or fairly priced when compared with its earnings.

To calculate the P/E ratio, you divide the market value per share by the earnings per share. For example, if a company’s stock is trading at $50 and its EPS is $5, the P/E ratio would be 10. As a result, investors are willing to pay $10 for every $1 of earnings.

The P/E ratio is used extensively because it provides a quick snapshot of a company’s valuation. A high P/E ratio may indicate that a stock is overvalued or investors expect high growth rates in the future. Conversely, a low P/E ratio could indicate that the stock is undervalued or that the company is experiencing financial troubles.

Earnings Growth

Earnings growth represents the increase in a company’s net income over a specific period, typically measured quarterly or annually. This metric provides valuable insight into a company’s financial health and future prospects.

Investors focus on earnings growth for several reasons. First, consistent earnings growth often signals that a company is effectively managing its resources and expanding its operations. This can indicate a strong business model and competent management, both of which are attractive qualities for potential investors.

Secondly, earnings growth is closely linked to stock price appreciation. Companies that demonstrate robust earnings growth tend to see their stock prices rise, rewarding shareholders with capital gains. 


Dividends are payments made by a corporation to its shareholders, usually in the form of cash or additional stock. They represent a portion of the company’s earnings and are typically distributed on a regular basis, such as quarterly. For investors, dividends can be a critical factor in assessing the attractiveness of a stock.

When evaluating potential investments, dividends serve as an indicator of a company’s financial health and profitability. A company that consistently pays dividends demonstrates stable earnings and a commitment to sharing profits with shareholders. This reliability can make dividend-paying stocks particularly appealing to income-focused investors who seek regular income streams alongside potential capital appreciation.

Moreover, the growth of dividends over time is a significant metric for investors. Companies that increase their dividends regularly signal confidence in their future earnings prospects and financial stability. 

Return on Equity

Return on equity (ROE) is another metric that can be used during bottom-up or fundamental analysis. ROE measures the profitability of a company relative to shareholders’ equity. It reflects how efficiently a company uses the money invested by its shareholders to generate profits. A higher ROE indicates a more efficient company in terms of profit generation.

To calculate ROE, you divide net income by shareholders’ equity. 

Net income is found on the company’s income statement, and shareholders’ equity is on the balance sheet. For example, if a company has a net income of $1 million and shareholders’ equity of $10 million, its ROE is 10%.

Investors use ROE to compare the financial performance of different companies in the same industry. A consistently high ROE suggests that a company is good at converting investment into profit, making it an attractive option for investors. However, it’s essential to consider other factors, such as the company’s debt levels, as high debt can artificially inflate ROE.

Focus on the Economic Big Picture

A man does some economic research from his home office while holding his son.

While fundamental analysis aims to determine the intrinsic value of a stock by taking a hyper-focused view of the company’s fundamentals, top-down analysis is a strategy that begins with evaluating the broader economic environment. Investors using this approach analyze the overall market and economic conditions before narrowing down to specific sectors or industries that are expected to perform well. 

Using Top-Down Analysis

Investors start by examining economic indicators such as gross domestic product (GDP) growth, interest rates, inflation and employment trends. These factors provide insights into the overall health and direction of the economy. For example, a rising GDP might indicate a growing economy, while increasing interest rates could signal tightening monetary policy.

Next, investors narrow their focus to specific industries that are likely to perform well under current economic conditions. This involves examining industry trends, competitive dynamics and regulatory impacts. By identifying sectors with strong growth potential, investors can pinpoint opportunities for investment.

Finally, within the chosen sectors, investors conduct thorough research on individual companies. They assess factors like market position, management quality, financial health and growth prospects. This comprehensive approach allows investors to make informed decisions and build a portfolio aligned with long-term economic trends.

Long-Term Investing Strategies

Long-term investing may incorporate a variety of approaches, including value investing, growth investing and income investing. Each strategy offers specific benefits and suits different investor goals, providing various paths for building a robust, long-term portfolio.

Value Investing

Value investing is a strategy where investors seek out undervalued stocks, aiming to buy shares at a price lower than their intrinsic value. This approach, popularized by legendary investors like Benjamin Graham and Warren Buffett, hinges on the belief that the market sometimes misprices stocks. Value investors adopt a long-term outlook, holding onto stocks until the market corrects its undervaluation.

Fundamental analysis is a cornerstone of value investing, which often involves analyzing financial ratios, such as the P/E ratio, and assessing the company’s financial statements. Value investors also seek a margin of safety by purchasing stocks at a significant discount to their intrinsic value, thus minimizing risk and maximizing potential returns. 

Growth Investing

Growth investing is primarily focused on capital appreciation. Unlike value investing, which targets undervalued stocks with strong fundamentals, growth investing seeks companies that exhibit signs of above-average growth, even if their stock prices appear high by traditional metrics.

Growth investors prioritize companies poised for rapid expansion, often in innovative industries like technology, healthcare and renewable energy. These companies typically reinvest earnings to fuel growth rather than pay dividends. As a result, their stocks can be more volatile but offer substantial long-term gains.

To implement a growth investing strategy, investors focus on companies with high revenue and earnings growth, innovative products or services, as well as strong market positions. They are willing to pay a premium for these stocks, betting on continued robust growth and significant future returns.

Income Investing

Income investing is a strategy focused on generating a steady stream of income through investments. Unlike growth investing, which aims for long-term capital appreciation, income investing prioritizes regular earnings, typically in the form of interest, dividends or rent.

Investors practicing income investing prioritize stocks with a history of dividend payments and dividend growth. They look for companies with strong cash flows and prudent management that can sustain and increase dividends over time. This approach offers both income and potential capital appreciation.

What to Avoid When Picking Stocks for the Long Term 

Investing in the stock market for the long term can be a fruitful endeavor, but it requires careful consideration and strategy. Here are some areas where you might look to avoid:

  • Chasing hot stocks: It’s tempting to invest in trendy stocks making headlines, but these can be volatile and unpredictable. Instead, focus on companies with a proven track record of stability and growth.
  • Neglecting diversification: Putting all your money into one or a few stocks can be risky. Diversification helps spread risk across different sectors and companies, reducing the impact of any single investment’s poor performance.
  • Ignoring fundamentals: Long-term investing should be based on solid research into a company’s fundamentals, such as earnings, revenue growth and competitive positioning. Avoid making decisions based solely on short-term price movements or market hype.
  • Overlooking valuation: Paying too much for a stock can limit potential returns. Evaluate whether a stock is fairly valued by looking at metrics like the P/E ratio and comparing it with industry peers.
  • Reacting to market noise: The stock market can be volatile, and reacting emotionally to short-term fluctuations can lead to poor decisions. Stay focused on your long-term strategy and avoid making impulsive trades.

Bottom Line

Picking stocks for the long term is an investment approach centered on stability, growth potential and informed decision-making. By focusing on a company’s fundamentals and diversifying investments across various sectors, investors can build a resilient portfolio that withstands market fluctuations. Avoiding impulsive decisions and staying committed to a well-researched strategy are key to achieving sustained financial success. Ultimately, long-term investing is about patience, understanding and strategic foresight, ensuring that investments grow steadily over time.

Tips for Investors

  • When building a portfolio, consider your strategic mix of stocks, bonds, cash and other assets. This is known as asset allocation. SmartAsset’s asset allocation calculator can help you find a potential investment mix suitable for your risk tolerance.
  • If you need help picking investments and managing your portfolio, consider working with a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

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