Stocks for the Long Term

With the turmoil in the stock markets, investing in shares is now -- more than ever -- about choosing a long-term strategy. In the shorter term, trying to pick companies whose stocks will appreciate significantly in the next six or 12 months is a bit of a crap shoot, as economists pore over the latest set of disappointing economic indicators and ponder the possibility of a double-dip recession. Choosing the right stocks for the long-term, however, is not straightforward either.

Index tracker schemes

Managing risk is vital for many investors, and there is clearly a high degree of risk attached to picking just one stock and hoping that it will perform well. A handy solution for the risk-averse is to invest in a fund that tracks the performance of a bundle of companies. The benefit of these index trackers is that the poor performance of a handful of companies will hopefully be made up for by the good performance of others within the fund. However, tracker funds may not appeal to people who believe they can beat the market with their individual stock picks.

Companies in industries that will always be in demand

The recent collapse of the finance sector shows that there are no safe bets in the world of stocks and shares. Many had viewed bank shares as a safe, long-term investment, because we will always need banks and because many had a proven track record of delivering dividends. Notwithstanding the results of that logic, it is still sensible to look for industries whose products and services are always likely to be in demand. One often-quoted example is the health-care sector. People will always need health care, and an aging population should only increase demand for medicines and health treatments.

Companies that have a strong brand advantage

Famous investor Warren Buffett has been quoted as saying that he would never sell his stocks in Coca-Cola or Gillette, as they have such an established brand strength and large market share. These factors give them a continued competitive advantage. Other companies would have to invest hugely to challenge their position of market dominance. It could reasonably be expected, therefore, that such companies will be well-placed to ride out any short-term economic crisis.

Companies in industries that are currently undervalued

Many investors believe that the best time to purchase shares is when the stock market is in turmoil. Their reasoning is that investor nervousness causes good companies to have their share prices marked down more than is rational. As an extreme example, the share prices of banks are down hugely compared to five years ago, due to the failure of a number of "toxic" banks. Not all banks were equally culpable, however, and it is a good bet that the better banks will return to strong performance in due course. For those who are prepared to accept a degree of risk and take a long-term approach, a small investment in select banks shares could lead to a good return farther down the line.

When pursuing a long-term investment strategy, investors need to be comfortable knowing that they are unlikely to have access to the invested funds in the short to medium term. And, as with all investment decisions, it's vital to understand that the value of funds can go up or down, and to consider the merits of getting professional advice.