When investing for the long term, it makes sense to consider a stock’s prospects beyond the immediate gains. This approach is typically used by investors when picking assets for a Stocks and Shares ISA.
Sure, there’s a wealth of attractive ‘hot stocks’ promising double-digit gains in the near future. But I don’t want to risk everything on the promise of quick returns. I want to turn my tax-free $20k annual ISA allowance into a slow and steady gift that keeps giving — even after I’m gone!
With that in mind, here are some tips I’ve adopted to aim for generational wealth well into the future.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Laying the groundwork
Every investor’s journey is unique, which is why copying another portfolio seldom works. It’s best to assess individual risk profile and ultimate goals.
That said, there are two common themes that most investors follow:
- Invest in what you know
- Build a diversified portfolio
As an IT guy, I’m a big fan of tech stocks. I understand them better so I know what risks to look out for. At the same time, the tech industry alone doesn’t dominate my portfolio because if it crashes, I would lose everything.
So I also hold some housing, banking and retail stocks. This makes my portfolio more defensive against volatile economic conditions.
Picking top stocks
Naturally, good investment decisions are a critical part of the strategy. There are many ways to value shares and none are perfect so I look for what ticks the most boxes.
Factors I take into account when assessing a company include past performance, management strategy, recent developments, competitors, and risks. That’s before even considering the various financial ratios and metrics.
Consider one I hold, the multinational information and analytics firm RELX (LSE: REL). It’s the parent company of popular anti-money laundering and fraud detection outfits like LexisNexis and Accuity.
Hundreds of banks and financial institutions around the world use these companies for risk management and fraud detection. So it’s fair to say it’s a well-established company with broad reach.
The share price has increased 526% over the past 20 years, representing an annualised growth of 9.6%.
At 32.9, its forward price-to-earnings (P/E) ratio is in line with the industry average. Its earnings-per-share (EPS) growth rate is 9.3% and it’s expected to rise 10% in the coming 12 months.
Everything about it is stable, reliable and… boring. Performance is fairly predictable and it achieves similar returns every year on average. That makes it an attractive stock for consistent long-term income.
Keeping safe
Still, even the most reliable stocks are susceptible to risks. RELX has recently increased its focus on artificial intelligence (AI). While the industry shows a lot of promise, it’s still nascent, which adds risk. There’s no guarantee it’ll deliver on its promises.
Additionally, as an international company, RELX is subject to changing regulatory frameworks and foreign exchange fluctuations. It also holds a wealth of highly sensitive data which faces the constant threat of a cybersecurity hack or data breach.
These factors threaten company profits and subsequently, the share price.
Still, it’s one of my more stable and consistent stocks and I plan to continue adding more of the shares to my portfolio as I work towards retirement.
