Do You Have An Exit Strategy?

Investors are always faced with the frustrating dilemma of whether to buy and hold or to exit taking profits off the table. Geyatee Deshpande explains why having an exit strategy before taking any position is quintessential if one wants to win in market conditions such as now

- Geyatee Despande

No matter what the market conditions are, investors are always faced with this peculiar dilemma of whether to adopt a buy and hold (forever) strategy or to exit stocks at regular intervals. Most so-called longterm investors adopt a buy and hold strategy and never sell shares even when the stocks have either multiplied or have fallen by more than 50 to 80 per cent. This is because the buy and hold temperament does not allow such investors to book early profit or loss. Thus, the perennial question is always about which option provides more returns. In other words, which strategy proves to be better in the long term: buy and hold or exit?

The answer to this question may not be objective. However, when we have a look at historical data and study how several investors have been stuck with underperforming stocks even after holding them for more than five years, we can say that there is a serious case for investors to consider adopting an exit strategy, either at the stock or the portfolio level.

Assuming a long-term investor adopts a buy and hold strategy and focuses on BSE 500 stocks as an investment basket, there is a good chance that he or she may have been stuck (negative returns) with at least 19 stocks (which made all-time highs in 2010) out of BSE 500 stocks even after remaining invested since 2010 till now i.e. April 2020. In other words, at least 19 stocks which were trending in 2010 and were bought by long-term investors adopting a buy and hold strategy did not manage to generate positive returns in spite of holding them for more than nine years!