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Investment Basics - Tuesday, January 22, 2013

The most important part of investing is not buying investments. The most important part is selling them because that is often where the profit is made (in the case of equities, at least). Smart investors start thinking about selling their stocks the moment they buy them. This is called an "exit strategy".

 

Here are some tips to help you create effective, profitable exit strategies:   

  • Use a spreadsheet to record the price you paid. If you bought at multiple prices, keep track and average them out.
  • Determine your "worst-case scenario" sell point, just in case the price declines dramatically. Some investors might set the sell price at 10% or 20% or 30% below their average purchase price and arrange with their broker to automatically trigger a sale if the price reaches that point.
  • Outline what factors need to be in place for you to feel good about selling your stock. Is it a certain price point? Is it a percentage of growth? Figure out what would make an ideal sale.
  • Commit to selling at your preferred price. Avoid the all-too-common mistake of seeing your stock achieve its ideal price then deciding not to sell and hoping it goes higher.
  • Keep an eye on your stock. Gather information about the company to determine what might make the price rise or fall. The longer you're invested in the stock, and the more information you gather, the better you'll be at determining if the price will be dramatically impacted by news and whether the price will rise or fall.

A smart, profitable exit strategy is the most important part of investing. Use these tips to help you find the best exit strategy for your financial plans and goals.