You should have a plan in place for your exit as soon as you enter into any endeavor or any investment. That doesn’t mean you can’t amend your plan as time goes on and as conditions change. It does mean that you should be thinking about your positioning and your objectives at all times. Having an exit strategy is an important component of taking control of your own life. It makes you think strategically about why you are where you are and what you are trying to accomplish there.
When I Googled “Exit Strategy” for this post, two contexts popped up. The first context related to exiting a building in case of a fire. This is good advice: When you go into a building, make sure you know how to get out of it in a hurry. Hotels and office buildings put their escape plans up on the wall usually near the elevators. Look for the red Exit signs. The second context was for war: Understand what an army’s objective is before the war starts and then get out when the objective is achieved. This is an area the US has not done well in during some recent wars.
In Investing, you can think about your Exit a number of different ways:
- You can Exit (sell) when you have achieved a pre-set return. Maybe you want to make 20% on a particular investment, and you do in fact make 20%. If you do, sell!
- Analysts typically put a price target on the stocks they cover. You can put your own target on it. Maybe this Biotech stock is trading at $15 and an Analyst says it has a price target of $32. If you believe the analyst and the stock hits $32, then sell it. Never mind that the analyst has now raised their price target to $40.
- Believe it or not, investments can go bad. This is a difficult Exit strategy because it involves booking losses, but you must sell investments that don’t work out the way you intended. I use a threshold of about 7% below the price I paid for it. If I buy a stock at $100 and it then goes down to $93, I sell it. Stocks that are going down may easily go down a lot more. One bad stock can tank your portfolio. “If you liked it at $100, you’ll love it at $93!” doesn’t work as an investment strategy.
- Another exit strategy relates to the passing of time. For instance, in your retirement portfolio, you may say you will stay 70% in stocks until your 55th birthday, whereupon you will reallocate more to safer fixed income as you near retirement.
Tip for Keeping Track
One tip for helping to establish your Exit Strategy (as well as to rationalize why you bought the stock in the first place) is to print out a one-page chart of the stock on the day you buy it. On the back of the chart, write down why you bought it when you did and also what your plan is to sell it. Put the chart with your thoughts in a binder or folder and refer to it from time to time. There is something about writing your thoughts down that makes it more real, even in this digital age.
Some people do, but most people do not have an exit strategy for the most significant aspect of their economic lives, which is their job. I believe that by just going to work every day without a plan for why you are working there and when you are planning to leave will leave you in a rut, aimlessly in a struggle for the legal tender. As you really should have a plan to leave your job (either through upward promotion or to another company), likewise you should have a plan as to when you should exit your investments. The best time to do so was when you bought the stocks. If you didn’t have your exit plan set when you bought the stock, the next best time to set up the exit plan is Now. Please contact me if you need help setting up your own Exit Strategy.