Trading.

 Spend More Time Thinking About Exit Points to Boost Your Trading and Investing

Finding stocks to buy takes up the bulk of time and effort for most traders and investors. They are always on the lookout for fresh concepts and alluring entrance points. The reasoning is simple. If I locate a solid stock, all I have to do is purchase it and hang onto it; everything else will take care of itself.

Exits are rarely the result of thorough research and a well-defined strategy; instead, they are frequently an afterthought and can be quite impetuous. In many cases, the sell decision isn't even taken into account until a change in the market's dynamics or some unexpected news compels a choice.

Small investors are not the only ones who disregard exit points. Researchers examined 2.4 million purchases and 2 million sales by institutional portfolio managers between 2000 and 2016 for a 2019 academic study. The stock these managers bought did well, but when it came time to sell, the stock they sold fared better than the one they had been holding. The investigation came to the conclusion that these professional money managers' selling outcomes would have been better if they had just sold equities at random.

Exit Points: Why They Are Ignored

That is a shocking finding that shows how departure points and selling are generally disregarded. This occurrence presumably has a number of causes.

Buying has a tendency to look forward. The decision-making process is thoughtful and thorough. Investors devote a lot of time to researching the fundamentals, charts, market environment, and other elements that influence the buying decision. Time and resources are devoted to this. The financial media places a much greater emphasis on articles discussing which equities to purchase than to sell. Wall Street as a whole is significantly weighted toward purchase decisions as opposed to selling ones.

Selling, on the other hand, is more impulsive and retrograde than other activities. It frequently results from a response to changing circumstances, which exposes it to behavioral and emotional biases and causes it to make a less-than-ideal choice. Many investors seldom, if ever, consider how they may sell a stock if they are compelled to. Warren Buffett's aphorism that his preferred holding time is eternity is widely accepted. When all you do is invest in fantastic stocks that you will never sell, why even consider exit strategies?

Exit points are ignored and frequently worse than random, mostly due to the lack of a strategy. When it is required to raise cash, there is a propensity to sell the best-performing stocks and hold to the weakest, which is often the incorrect move to make.

The Answer

Ensuring that exit points are taken into account when entering stocks is the apparent answer to this issue. It might be difficult to weigh all the possible tactics since there are so many possible outcomes for investment or transaction.

For many investors, having a very mechanical method that eliminates subjectivity is the ideal approach to selling. Your best buddy can be rigid stop-out points, but use their calls for tight compliance. As I've previously mentioned, using a stop-out mechanism in conjunction with a rebuy strategy might help allay some of the worries associated with selling a terrific stock at the wrong moment.

The answer to this problem, like many other issues in trading and investing, is awareness. It is significantly more beneficial to just be far more conscious of how crucial it is to think through the sale choice in advance rather than merely acting when you are forced to. Our returns would be far higher if we had properly planned both our buying and selling decisions.

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