Exit strategy

Getting into any investment without any exit strategy can be fatal. Some people I know in my workplace put money into something just because it is a “good buy”. However, buying things doesn’t make you money, does it? It’s selling them that does.

As a simple case in point, my colleague bought a penny stock through recommendation at a pretty good price and it was doing fairly well, appreciating a few cents for the following few days and mind you, a few cents in penny stocks is huge.

She bought almost 50 lots at 0.105 and it peaked at 0.15 and hovered around 0.12 to 0.13 for at least the following 2-3 weeks. That’s 15 - 20% profit! Yet, she insisted on holding it, claiming that it can increase more. Greed, in other words, gets in the way.

And the following month saw the decrease to 0.11 and hovering at that for a good one month or so before plunging below her buying price. Even at 0.11 was a 5% which, and after all the fees, translates to couple of hundreds bucks, not too bad if you ask me.

She insisted on keeping even after paper loss of 10% and it has been 3 months where the price hovers around 0.095 to 0.1, in which I suggest cutting losses. As of now, the price is standing at 0.09 with a paper loss of 700+ bucks; good luck to that.

She probably didn’t know what she was getting into; she had no idea what that company was, what kind of business they are doing, etc., basically basing her buy on hearsay. Even worse was that there wasn’t even the slightest idea of how, what and when she can expect to get out of that speculation. Of course, she is also dangerously putting all eggs in one basket, but well, that’s a topic for another day.

Exit strategy in this context basically refers to the taking of profits or cutting losses when they rise or fall to a certain percentage. This can be done by oneself or done through take-profit or stop-loss orders with your broker to automate the process.

For speculation, traders typically use technical analysis to determine the optimal exit point for maximizing profits or eliminate holdings that don’t perform. On the other hand and personally, people who play for long term, like for example indexing, set specific targets within certain period of time-frame to lock in the profits to either reduce trading frequencies, reduce downside potential for capital preservation or rebalancing purposes. In short, all these strategies help by removing the emotion factor from the equation to reduce risk.

It’s also like buying a car, where despite the fact that it depreciates, what exit strategy do you have in mind and how much you are willing to lose are important considerations that needs to be made prior to buying in. One way to help make that decision is perhaps through calculation of the breakeven point of your car loan and car value?

This can also be said the same for your career as well and now your time is the investment in question. Are you still learning new things and contributing to your professional growth? Are you heading in the direction you want in your career? Do you see any prospects in your company or department? These are some of the considerations that are worth thinking about when making your investment of your most important resource.

On the point of career, not everyone is willing to work past 65, just as some are not comfortable in retiring too young at say 45. Having a clear exit strategy will ultimately define your retirement planning; how aggressive you need to save, how much risk you can take, etc.