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The term “exit strategy” came into common use in the late 1960s, when U.S. officials were struggling with the best way to cut the nation’s losses from the Vietnam War. These days, it’s more commonly used to describe a way to maximize your investment profits and minimize losses by having a plan to sell something in your portfolio before it loses significant value.
A long-term buy-and-hold strategy is considered the best method for building investment wealth from stocks. But sometimes, it’s necessary to walk away. Smart investors define the best time to walk away -- an exit strategy -- early in the process, sometimes even before buying stock.
Exit strategies are often described as guardrails. Investors who set parameters for the performance of their investments are much more likely to be successful than investors who are guided by emotion. The market can be a volatile place, and it’s easy to make spur-of-the-moment decisions that feel right at the time but may lead to poor financial results later.
An exit strategy is about more than simply cutting your losses. It needs to be part of every investor’s overall plan. To set an exit strategy, you first have to decide how long you want to hold your investment. You need to define criteria that measure its performance. And you need to determine the changes that would make you sell the investment or buy more of it.
A well-designed exit strategy doesn’t simply set a price at which you get rid of an investment; it considers a range of possibilities for the best time to exit an investment. The key is to think strategically, not tactically. Here are four time-tested strategies:
There are a number of orders you can use to implement an exit strategy. The most common and simplest involves placing a market order. Your investment will be sold, although not necessarily at the price you immediately wanted.
An exit strategy is the epitome of hoping for the best but planning for the worst. A buy-and-hold strategy is still the best, most proven strategy for building wealth, but even the most patient investors know that there are times when it makes sense to unload an investment. Creating an exit strategy will provide you with a plan that’s ruled by your long-term goals instead of emotions.
