FOMO stands for ‘fear of missing out’. The financial markets have been rising on a tide of FOMO in recent weeks. It began with the GameStop mania that saw some retail investors going head to head with the hedge funds in a short squeeze. Now the excitement spreading across social media continues. This makes it easy to get caught up in the heady euphoria. But that’s just a short-term buzz, and I think long-term investments makes for a better strategy.
Choosing long-term investments
I think it’s possible to make money from the stock market by following a calm and strategic plan without getting caught up in any FOMO frenzy. Long-term investing provides a steady way to build wealth and gradually compound gains. This is easier if the stock pays dividends, but it’s also possible with regular investing in growth companies.
To find these potential investments, I have some criteria to look for. Firstly, I want to invest in companies that are well established. I want them to have a competitive edge and to offer something that means they’re still likely to be here far in the future. Then I check their financial state, keeping an eye out for red flags like too much debt or a pension deficit.
If all these boxes are ticked, then I look for a dividend and a low price-to-earnings ratio (P/E). In the current bull market, it’s hard to find stocks that meet all the criteria, but that doesn’t mean there aren’t gems out there.
Searching for long-term value
The pandemic has created a deep divide between quality stocks reaching high valuations and stocks with a less certain outlook being potentially undervalued. Some high prices make these stocks risky because they’re priced for perfection. So even slightly bad news could send the share price tumbling. Equally, some unloved stocks will ultimately fail. But between the expensive and cheap there are stocks I believe have a good way to climb.
For beginners to investing I think the FTSE 350 is generally considered a safer place to look for long-term investments than the FTSE AIM market. The companies in the FTSE 100 and FTSE 250 have to meet stricter requirements for listing, meaning they are more likely to be well established.
I think it’s important to create a diversified portfolio containing stocks from a variety of sectors. This mitigates risk. I also think it’s a good idea to invest regularly. By buying stocks monthly, I can build up my portfolio steadily. It also takes the stress out of trying to time the market. And is one way to offset the risk of buying too high before the market turns bearish.
I understand the thrill of a roller-coaster stock-picking ride. But for me, it makes more sense to approach my future with a logical strategy in mind. I’ll be avoiding the FOMO stocks like GameStop and focussing on a long-term investing strategy that builds wealth steadily.
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Kirsteen 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.