Investing: Having an Exit Strategy

There are a lot of comparisons between gambling and investing. Both use money and the outcomes on both are that you can lose or gain money. But with investing you have odds on your side, the stock market increases by an average of around 7% per year, so if you are in it for the long haul, you should come out ahead. Whereas if you gamble in a casino, it will be the opposite of the Hunger Games, because "the odds are never in your favor."

But there are still good lessons that can be used in both gambling and investing. Today I will be focusing on having an "Exit Strategy". Before you invest in something you should always have a plan on how to get your money out. There are many approaches to this but I think that the worst approach is to not have a plan before you get in.

You got to know when to hold 'em

Sometimes investments will dip a little, or sometimes they will just consolidate at a specific price for a while seemingly not gaining or losing. You may think that it's time to move on from this particular stock but there's some things you should consider. Why did you first buy this investment? Did you buy it because of technical analysis or because of news you read? Whatever that reason was, has it changed since you bought it? If it hasn't then you might want to just hold on and wait.

Know when to fold 'em

Just like before, if a stock is virtually unchanged after a long period of time then maybe you should re-evaluate the stock. If something has changed since you bought it, maybe it's time to move on to a better investment. Perhaps your initial evaluation of the company was off.

Know when to walk away

Sometimes your evaluation of a company is wrong for one reason or another, how you got into the situation is not important, but knowing when to cut your losses with a losing stock is important. Not every stock will bounce back. For every Netflix type company that bounces back huge, there are hundreds of others that never return to their former glory (Blackberry anyone?). Walking away before wasting more time and money in that stock is sometimes the best move.

and know when to run

Sometimes you're just flat out wrong. Things go so poorly that you should run for the doors like there's a fire on the dance floor. Perhaps you were invested in a company with an upcoming binary event. If that event turns out poorly, you might want to try to be one of the first ones to get your money out before your investment is worth less.

Thank you Kenny Rogers to helping inspire the structure of this post!

Using a stop loss

Usually with my investments I pick an exit point, I use a stop loss to sell if the value drops below a certain level. Let's say I buy a stock at $100 and I know it's a wildly fluctuating company where it regularly fluctuates +/-10% each week. First, I would start buy waiting for a pull back before I buy, but once I'm in, I might put a stop loss in around $84 (16%) so that I'm not immediately sold out of my position if it has a bad week. If the company doesn't fluctuate as much then I would probably set a higher stop loss. I think it's also important to revisit these stop losses every so often, if the company has gone up and is now worth $150 per share, then an $86 dollar stop loss no longer seems like a wise decision, it's probably better to bring it up to at least over $100, so that even if the value declines you can get your original money back or more.

All investments are different so an exit strategy can vary between each of them. It can also be good to know when to quit while you're ahead. If a stock has skyrocketed it's sometimes wise to sell the position and wait for a better opportunity to come along so you can put that money to better use.

I would love to hear if other people have other ways to approaching this. Getting out can be the toughest part, so how do you approach your exit strategy?

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