4 Stock Exit Strategies - How and Why to Cut Your Losses Early

  • Posted By : reliancesmartmoney.com
  • Friday Aug 24, 2018

Key takeaways

  • Let every buy be a part of a larger financial objective
  • Enter the trade with a pre-conceived idea of how long you plan to hold
  • Same goes for the outer-limit of loss you’re willing to bear on sale
  • Be flexible to allow for economic and corporate upheavals, rebalance/sell holdings accordingly

A key skill in building up an enviable and successful stock portfolio is getting in, and out of a stock at the appropriate time. Getting out of a stock and cutting losses early is one of the prime strategies followed by successful investors. There is nothing wrong with losing money on a stock, that’s the nature of the market. Recognising and weeding out dud stocks from your portfolio at the right time (as opposed to panic-selling solid stocks during a downturn) is an important instinct to cultivate.

Let’s look at some of the ways to fine-tune your knack with exiting early…

1. Have your objective in place :Most investors know that ‘get rich quick’ is a flash in the pan occurrence. Players of the long game have a set objective in mind, appreciating their invested wealth by x%, supplementing their other investments by a certain amount and certain time. Stay on course till your requirement is met before making your exit.

2. Decide your holding period beforehand :Every objective is linked also to a time frame, stick to it. It’ll be tempting to cash in and run for shelter during bear phases and cyclic downturns. But more often than not, staying the course and riding out a downturn allows you to reap the recovery gains as the market swings back around. So, if your holding period was 4 years in order to meet a certain level of returns, fight the urge to sell just because everyone else is and stick around for the recovery.

3. Know your ‘exit’ before you ‘enter’ :– Just as you have a holding period in mind, you also need to know the outer limit for your risk-tolerance. Know upfront how much money you are willing to lose on the trade should you decide to sell the stock. And should the price hit that low, then sell. Don’t let pride, and market sentiment override the risk-tolerance limit you had set yourself at the start of the trade.

4. Be flexible :– Your investment strategy needs to be rooted in the economic outlook, the fundamentals of the financial markets and your objectives. While selling on an impulse, or only to go with the flow is not recommended, you should periodically review your investments and rebalance or sell your holdings based on their performance and valuations. This will reduce your exposure to volatility and help you fine-tune your market-reading radar.   

By now you’re probably wondering ‘But how early should ‘early’ be?’, and it’s a fair ask. Each investor’s threshold varies greatly in relation to one another, and from one share to the next. Several factors will come in play when deciding your exit point, key among them being

  • Your own risk appetite
  • The fundamentals of the company, and its performance after previous downturns

Either way, it helps to set for you a smaller tolerance margin on short-term trades, and a larger one for long-term trades. The only one who can decide those margins is you.

Knowing when to exit your trades is critical to generating, and maintaining a high-performing portfolio. The world of trading may be complex, but some of the skills to successful investing are mostly common-sense. Good research, a keen ear to the ground, and discipline are your main tools – enter the market well-armed with them, but have a structured plan ready for exits – one based on your experiences, gut instincts and risk appetite.

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