What US stocks should an investor buy for a long-term strategy?

How to select assets for an investor for long-term investment strategy?

In order to select stocks for a portfolio with a long-term strategy, it is necessary to clearly formulate the criteria for selecting companies, and then regularly monitor these metrics for each asset selected for a long-term portfolio. Often the investor's strategy is not formulated and changes unconsciously, the investor changes the composition of the portfolio under the influence of some news or temporary financial factors.

When buying US stocks in a long-term portfolio, you also need to understand how much risk the investor wants to work with, what share this company from a particular sector will occupy in the portfolio, and you also need to decide how often the investor will rebalance the portfolio.

Long-term investment strategy, its advantages

If an investor is looking for maximum capital gains and is not interested in dividend income or regular withdrawals, then a long-term investment strategy is best suited for this.

The main advantage of a long-term strategy is the ability to take on more risk and still get the best possible capital gains, more than the S&P500 broad market index. The second benefit is the ability to pay less tax on capital gains.

Naturally, it is very difficult to tell the details in a nutshell, but it is possible and necessary to optimize the tax burden. At the same time, the potentially saved funds will work for the investor for the entire investment period and thereby increase the net profit from investments, taking into account compound interest.

What assets to choose in the investor's long-term portfolio?

Taking more risk, the investor seeks to include more risky assets in the portfolio, with greater volatility and growth potential. As a rule, aggressive strategies are aimed at long-term growth and include assets with a high PE Ratio.

Growth potential, a high debt-to-equity ratio, and a high ROE are often the main criteria for asset selection. In addition to these indicators, you can use EV/EBITDA multipliers, Beta and Exp.Return. It is rather difficult for an ordinary investor to independently perform such an analysis. Therefore, we always recommend that you contact our company for analytics and advice.

The complexity of the selection lies in the fact that the strategy can vary greatly depending on the financial condition of the investor and his family and tax circumstances. The investment horizon is also important, since a long-term strategy is 10 or more years, the investor must understand that the portfolio cannot be sold or withdrawn from the portfolio for quite a long time.

The degree of risk in the investor's long-term portfolio

The degree of risk that will be included in the portfolio of a long-term investor must naturally be optimized, and this must be done professionally and carefully. An aggressive strategy may consist of high-risk assets, but this risk must be balanced by including medium and stable companies with low Beta in the portfolio, that is, shares of companies that are less sensitive to the business cycle.

The correct approach to the formation of a long-term portfolio involves the formalization of the main criteria for selecting assets, the adoption of restrictions on the size of the position (minimum and maximum weights in the portfolio for one position). As a result, the resulting portfolio will need to be balanced and smooth out the degree of risk: reduce the portfolio volatility, optimize the Beta of the portfolio, and maximize the expected return.

In the future, when servicing this portfolio, it will be necessary to monitor how the risk parameters of the portfolio change, and if the value of the portfolio grows, then the degree of risk of this portfolio also grows. The main thing is to periodically rebalance the portfolio and bring the risk parameters to more balanced values.

How to deal with drawdowns in a long-term portfolio?

Portfolio drawdowns are natural declines in the value of an investor's total portfolio that periodically occur as large market players close positions, sell assets, and instead of these positions open other positions.

Large institutional investors cannot sit in the "cash", they need to invest capital and maintain minimum requirements for the presence of "cash" in the portfolio. In other words, they need to always be invested. Individual non-professional investors do not have these restrictions, and may also periodically cash out and open positions during calmer times.

But there are a number of unobvious negative effects that can be circumvented if you endure a portfolio drawdown and do not “go into cash”. Entering the "cash", the investor always fixes a profit or loss, or fixes a smaller profit. Portfolio value drawdowns of 5%, 10% and 15% are normal, but it all depends on how risky the investor's portfolio is.

If the portfolio has a volatility of 25-35%, and the drawdown was from the average value within this volatility, then this is basically normal. If an investor is confident in the composition of the portfolio, understands that there have been and will always be temporary recessions, then in the end such an investor will be rewarded for patience on a long-term investment horizon.

This is the whole essence of the long-term strategy, to take risk and receive reward per unit of risk, just on the long-term horizon, for example, after 5 years, a drop of 15% -25% will look insignificant because a quality portfolio will always beat the market and give a return greater than broad market index S&P500.

Market entry point for a long-term investor

Understanding the importance of a long-term strategy, the question arises: when to enter the market, in what period, should we expect a drawdown or market correction, which are possible only 1-2 times a year? Yes, the choice is quite difficult, but this problem can be solved by mathematically and statistically calculating the most acceptable entry points for the entire portfolio.

If you can wait a bit, then you can open positions on the entire portfolio in a very good place and have more potential for growth due to the moment of entry. Momentum is usually calculated and can be a factor in adjusting the size of each portfolio position in order to smooth out differences between the drawdown depth of each asset in the portfolio.

For such a reasonable and optimal entry into the market, it is necessary to carry out complex calculations and calculate the statistical parameters of drawdown and volatility of all assets in the portfolio. Naturally, a retail investor will not be able to do this on his own, so we recommend contacting our company to develop an investment strategy that will take into account the moment of entering the market.

Such fine-tuning can be done as part of financial engineering, and then you will first have to develop an investment strategy, and then in 1-2 months, under a favorable scenario, update the portfolio on the date of entry into the market, when the moment for opening portfolio positions will be optimal for the investor.

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Why is investing in US stocks becoming increasingly attractive to investors? Find out the answer to this question on the main page of IQ Smart Capital! We offer the opportunity to learn the key aspects of investing in US stocks, including company selection, market analysis and portfolio management strategies. Dive into the world of investing today!

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Zair Iusupov is an investment architect, a specialist in building portfolio solutions for private investors, business owners, HNWI and UHNWI clients. He has expertise in the field of financial engineering, portfolio investment risk management, strategic asset allocation and development of individual investment solutions.

He specializes in developing portfolio strategies for investors with capital of $300K–$5M+, combining in-depth macroeconomic analysis, fundamental assessment of US and European companies, Strategic Asset Allocation, Investment Policy Statement, a quantitative approach to risk assessment and long-term investment discipline.

Zair Iusupov

Founder and Chief Investment Officer

Wealth Management and Private Advisory (US, EU)

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