The Exit Strategy – Exiting From an Investment
The Exit Strategy is about planning for an eventual exit from an investment. It deals with realization of profit or loss from an investment. A lot of investors forget to plan the Exit Strategy. Some of them do not even know what is it about. Successful traders and businesses employ the exit strategy to prepare for the worst case scenario in an investment. It makes them plan ahead and work out a strategy to exit the investment, at a minimal loss.
The Exit Strategy should not focus on profit alone. It must also have a plan for what can be done if a loss should arise. Take for example a business which opens a restaurant. An investment of $300,000 has been made into that restaurant. It would be wise for the investor to think and plan ahead how the invested capital can be recouped should the restaurant run into a loss. Maybe the restaurant can be sold or it can be rented. How easy or hard is it to sell a restaurant? How much of that invested capital can be recouped?
By working out these options right upfront, it will help the investor to plan from the very beginning for such a scenario. This ensures that the investor is never lost and is not left without any options. Always remember that the capital must not be lost and it must be recouped so that it can be reinvested into other investments. If the capital is lost, it would set the investor back by a huge amount as the investor would now need to earn back that lost capital before going into business again. Such an Exit Strategy is one of the factors that makes businesses recover after a lost venture whereas others are never able to recover at all.
The same applies to investing in gold, silver or equity. The protection of capital should be at the forefront of a wise investment strategy. The exit strategy is the component of an investment strategy that ensures protection of capital.
The Exit Strategy lays out a set of conditions that will trigger an exit out of an investment. In the article on Entry Strategy, we discussed the various types of investment styles such as value investing, technical analyst and income or dividend investing. Each of these investment styles has its own Entry Strategy. Similarly, each of these styles of investing also has a corresponding Exit Strategy.
An example of a simple stock investment strategy is as follows. The part in bold is the exit strategy.
As a means to create passive income, to invest $10,000 in Company ABC when it’s price is below $15 and a new uptrend is established so that the yield will be higher than 5%. An exit out of the investment will take place when the price hits $25, the cut loss will be set at $14.25 (at 5% cut loss).
The idea of this investment strategy is to earn a dividend and to ride the profits but to minimize the loss to 5% should the stock head down. This strategy will ensure the investor gets back 95% of the capital to be reinvested into other better performing stock.
Exit Strategy is an important component of overall trade strategy and it works to help the investor plan ahead for either a profit or loss situation. It will help to protect the capital. It is a must for every investor to have a clearly defined exit strategy in order to succeed in investing.
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