Investing for the long term? Here’s what I’d do

The evolution of FTSE 100 constituents shows us that spotting trends early is key to investing well over the long term, writes Thomas Carr.

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2020 has been a year that looks like it will have a profound impact on the future. It’s undoubtedly sped up the transition to digital technologies. It also seems to have made us think more about the environment. In my opinion, these are two of the biggest investment issues for the future. These are the kind of issues I need to think about when I’m investing for the long term.

Just over a decade ago, the FTSE 100 was dominated by banking, mining, oil, telecoms and tobacco. These sectors still make up a significant chunk of the index. But their relative size has gradually reduced over time. The decline started with the banks suffering big losses during the financial crisis and continued with the oil price collapse of the last few years.

FTSE 100 reshuffle

In my opinion, the days of these sectors dominating the FTSE 100 will end in the years ahead. In order to achieve the best investment returns, I think I need to look to new sectors that are growing quickly. Primarily, I think that means I need to focus on companies using technology in novel ways. Historically, the UK index hasn’t benefited from tech companies in the same way that US indices have. But I think that will change. Increasingly, digital technology is at the heart of innovation, and I expect that to feed through to the UK main market in time.

This means it’s all about thinking ahead. What are the up and coming technologies? What kind of impact are they going to have? If I want to invest successfully over the long term, then I need to be thinking about these questions now. I need to be able to spot the individual companies that are going to take advantage of these opportunities. I also need to be able to assess whether their share prices represent good value.

This is where the difficulty lies. For that reason, I’d buy an industry-focused fund or trust, over individual stocks.

Where I’d invest for the long term

But which industries would I look at? There are a few key areas that stand out to me. First of all, I’m interested in companies that are able to add value in the shift to cleaner energy. That means companies involved in the production, storage and distribution of clean energy. I also see a continued focus on large-scale infrastructure modernisation that will make travel easier and safer. 

Away from energy and infrastructure, I’m drawn to digitisation, artificial intelligence and big data. I’m particularly interested in applications that will aid business operations and communications, as well as consumer technologies targeted at the average person on the street. Robotics have already been deployed in large-scale production, but in time I expect this to filter down to every level of business. And as the world becomes increasingly digital, cyber security should grow in importance. 

Meanwhile, this year has shown just how crucial large pharmaceutical companies are going to be in protecting us in the future. The winners of tomorrow all have one thing in common. They’re all investing heavily in research and development today. R&D is the foundation for innovation. And innovation is a precursor to long-run profitability. I think that’s something I need to bear in mind when assessing the value of a stock.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Thomas has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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