Disclaimer:
I am not a financial adviser. You should consider seeking independent legal, financial, or other advice to determine how the information in this post relates to your unique circumstances.
I am not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly, by use of this website.

In order to avoid emotional decisions or decisions made under duress, it is important to define an exit strategy for each financial position ahead of time. This idea can also be extended to non-financial aspects of life; a diet, workout, relationship etc.

Let’s start by defining what I mean by an ‘Exit Strategy’ (I have my own definition that is not completely linked to the accepted financial definition). For me an exit strategy for a given decision consists of; a trigger or threshold and a corresponding action to be taken. Each decision can have multiple Trigger/Action pairs. As an example:

Decision: I want to keep my hand under hot water
Exit Strategy:

• Pair A – Threshold Reached (Pain threshold reached):
  • Trigger: Body tells me the water is too hot and will cause burning
  • Action: Move hand out of water
• Pair B – Time-based (20 seconds elapsed):
  • Trigger: Time has elapsed by 20 seconds
  • Action: Move hand out of water

Following this simple structure, at least one Trigger/Action pair should be defined for each Exit Strategy from a major decision.

All or Nothing?

Exit Strategies do not need be an all or nothing affair. Partial exits can be defined as part of an action. We’ll use a financial example to demonstrate this:

Decision: Invest $10,000 to purchase 1,000 shares at $10 per share in new technology company XYZ.Co
Exit Strategy:

• Pair A – Threshold Reached (Share Price = $15):
  • Trigger: Share Price reached $15
  • Action: Sell 500 shares at $15 for $7,500. Retain remaining 500 shares. Revise Exit Strategy.
• Pair B – Time-based (2 years elapsed):
  • Trigger: Time has elapsed by 2 years
  • Action: Sell 250 shares at current price. Retain remaining 750 shares. Revise Exit Strategy

Revision of Exit Strategy

Although we define our Exit Strategy upfront to avoid future emotional decisions or decisions made under duress, that does not mean the Exit Strategy per decision is static. The Trigger/Action pairs need to be revised based on the nature of the decision and every time one or more Trigger/Action pairs are executed. As a rule of thumb, long-term decisions should have fewer revisions than short-term decisions.

If you are finding you are revising Exit Strategies too often, then perhaps you have not created clear and comprehensive Trigger/Action pairs. The first few times you encounter a Trigger you will be confronted and this is when you are most tested. It will take honesty and courage to determine your course of action; commit to your previously defined Exit Strategy or decide that there is significant new information to allow deviation. The reasons to do so however should never be emotional or under duress.