Investors woke Friday to the news that trade tensions between Canada and the U.S. were back on the table. This comes at a time when many Canadian investors have no doubt already been figuring out exit strategies for certain names in an uncertain market. Some stocks displaying overvaluation were looking like prime targets to trim. Heading into next week, this recent development only strengthens that thesis.
Get ready to sell overvalued stocks
Investors raising liquidity by trimming – or outright selling – certain names, may want to funnel some of it into better performing names. For instance, say you’ve finally decided to reduce your position in Suncor. You could build a larger position in one of the Big Five banks with this cash, or channel some of it into ETFs. Diversifying a portfolio across asset types is a strong move right now.
However you want to cut it, though, investors should always have an exit strategy. Whether that strategy calls for trimming the fat or outright slaughtering certain stocks, knowing when to sell is vital. For instance, you may decide that your sell point is a dip of 10%. Or it could be a dip of any given percentage, but with a threshold of a certain period, such as a few days of shares being sold off.
Investors looking to buy and hold should be especially aware of their exit strategy. Long-term shareholders tend to have stronger relationships with their companies, which makes it easier on the one hand to get a feel for their outlook, track record, and balance sheet. On the negative side, an emotional attachment or the old “sunk cost fallacy,” can make it harder to sell stocks.
Don’t be a bagholder
It’s hard to gauge how much of the market is propped up by investors who don’t know when to quit. But one way to ensure that you don’t end up being a bagholder is to know when it’s time to cut your losses. The sunk cost fallacy isn’t just a danger when you double down on losses. Being passive and holding onto dud stocks is another manifestation of this same dead end investment phenomenon.
It’s time to cash in two distinct types of stocks right now. The first type is anything overvalued without a reasonable growth thesis not dependent on the continuation of the pandemic. The second is anything that has stopped growing and has a weak outlook.
Good examples of the first type of stock to cash in would be overvalued tech stocks such as Shopify. The second kind of stock is typified by Suncor.
Look at valuations, look at upside potential, and look at how these markets are likely to perform in a frothy second half of the year.
The reintroduction of aluminum tariffs won’t just knock metals and manufacturing stocks out of whack; it will have a broad effect on the entire market. The last thing that the Canadian economy needs right now is a resurgence of American protectionism.
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Fool contributor Victoria Hetherington has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Shopify and Shopify.