What is an Exit Strategy?
An exit strategy is a plan established before or during an investment that defines the conditions under which you will sell. Without an exit strategy, investors are vulnerable to holding winners until gains evaporate or clinging to losers hoping for a recovery that never comes.
Exit Strategies for Individual Investments
For individual stocks, define sell criteria at the time of purchase. Profit-taking triggers might include reaching a target price, valuation metrics (P/E, P/B) exceeding historical norms, or slowing earnings growth. Loss-cutting triggers include the investment thesis being invalidated, a predetermined percentage decline, or deteriorating fundamentals. Rules-based selling removes emotion from the decision and enforces discipline.
Retirement Drawdown Strategy
Drawing down assets in retirement also requires an exit strategy. The 4% rule suggests withdrawing 4% of your portfolio in the first year of retirement and adjusting that amount for inflation each year, to sustain a 30-year retirement.