The following is a transcription of the above video, and The Market Herald Canada has edited it for clarity.
Welcome to Wiser Wealth. We are back speaking with Howard Katz, managing director at Research Capital Corp. in Toronto. Previously we spoke with him about valuation targets, but the topic is switching today as we will be discussing what goes into creating an exit strategy.
TMH: When thinking about an exit strategy, what would the key factors be that could help guide investors in that process?
Katz: I think what I would recommend to any investor, first, is just to consult with their own financial advisor. Someone who’s registered and able to give them the appropriate advice given their financial circumstances, assuming that they’ve done that. Then I would explore the idea of setting profit parameters or stop-loss parameters.
Assuming, let’s say that the stock does well. And you have set a certain targeted rate of return. At that point, then there’s an analysis that needs to be made. Do I continue to hold the stock? Or would then perhaps do I take my profits and look for another opportunity?
Conversely, we also need to look at the downside scenario. So if a company, for example, in this case, goes down. Then you would examine as to whether you want to keep on holding the stock or do you rather just sort of take your losses and then try to preserve capital at that point.
Usually what I would recommend at a high level though, is that investors go in with a game plan and go in with understanding what their objectives are. So that way they can attach some objective criteria to their decision-making process.
TMH: And then for factors that would help deciding between a long-term or short-term exit strategy, what is the difference between those two for a client?
Katz: That again speaks to, in my opinion, the risk/return appetite for any said investors.
So, if an investor has a certain rate of return over a certain period of time, they may have satisfied their investment objectives. And so that would suggest to me at least that they potentially would exit that investment if for example that investment happened to be potentially riskier of nature.
That being said, if you are invested in a company with good long-term prospects, good growth potential … and it’s a solid operating company, it’s not unusual for investors to take a longer time horizon as a sort of investment objective.
Again, it gets down to the specific circumstances and usually it does require some consultation with your investment advisor.
TMH: And then in your opinion, what role do you think the market sentiment and economic conditions kind of play in your evaluation and exit strategy decisions?
Katz: In a word, huge. The impact of what you described to me are the macros, the macro economic indicators, or the macro policy indicators can potentially have a very large impact.
Right now, we’re in a higher interest rate environment. And so what we’ve seen over the past year while some sectors have done reasonably well, for example, the big caps have done reasonably well, in relationship to what I’ve seen in the smaller cap spectrum, for example, there’s definitely been a bias towards big cap.
And that’s being driven in part because of a risk-off mentality due to the higher interest rates. So that’s just one example. Layer onto that the advent of some geopolitical uncertainty that we’ve seen over the last year and a half, so it does contribute into a certain investor mindset.
And then there’s a certain bias to where people allocate their funds. So, if an investor is making a decent rate of return in a relatively low-risk asset class, that’s going to impact the way broader market invests in equities more generally. And we’ve definitely seen that.
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