Making a plan to sell
Without a plan it can be hard to know when to sell an investment. Learn how to make an exit strategy.
July 14, 2022
We spend a lot of time deciding what investments to buy, but it’s just as important to set a plan to decide when to sell those investments.
And knowing when to sell an investment is like trying to figure out when to get off the highway without a GPS. Without a plan, it’s hard to know when to exit!
What’s an exit strategy?
An exit strategy is simply a plan for selling an investment.
There’s no one-size-fits-all exit strategy for each investor or even each investment. But each good exit strategy considers your risk tolerance, time horizon, and investing goals.
All investors need an exit strategy
Both active traders and long-term investors should have an exit strategy to guide their decision-making. Without it, it’s easy to let emotions like fear or greed get in the way.
Consider this scenario: Imagine you buy a stock for $10. The market is up, and the company is doing well, so the stock price rises over time to $15, then $20, then $25.
You say to yourself, “I’ll sell when it hits $30.” You watch the stock price climb to $26, $27, $28…and the next day it drops to $9—even less than what you originally paid.
This “wait and see” approach to investing puts rational judgement on the backburner. It could even cause you to lose profits, like our example above.
Exit strategies to consider
- Price target: Set a target price for your investment and stick with it. If it hits that price, you sell, regardless of its potential to keep going up.
- Loss limit: Set a limit that you’re willing to lose on an investment. It could be a dollar amount or a percentage of what you initially invested. If it drops down to that amount, you sell.
- Goal timeline: If you invested for a specific life goal, and it comes time to use the money (say, for a down payment on a house), you sell.
Other factors that could impact your decision to sell:
- You lose confidence in the company or fund
- Your risk tolerance changes
- You want to rebalance your investments
- To benefit your tax situation