Buy and Hold Forever vs Having an Exit Strategy
As a stock trader or investor, when considering opening a position in a particular stock, do you plan on buy and hold forever that position? Or, do you think about having some sort of exit strategy?
What ever the thought process you have, you'll likely have better results with some type of planning ahead of time as opposed to thinking about it later.
As of the time I'm writing this article I'm in my mid-40's. I can remember growing up, in particular, the time period in the late 90's before the tech bubble burst, and the common mindset was to buy stocks and hold them forever (or pretty darn close).
Not once did I ever hear anyone talk about when to sell a stock or different types of exit strategies. It was always buy, hold forever and watch the stocks go up.
I also remember that on more than one occasion people had shown me short and long term charts of the DJIA. Just like as you can see on the first chart below, people were always pointing out the lower left to upper right price movement over the long term. It was a no-brainer, can't lose situation.
Little did people know that the "buy and hold forever" theory took a serious blow shortly after in late 1999-2000 for new traders and investors.
Take a look at the next chart. Early investors of the buy and hold forever theory (those getting into positions prior to the late 90's) are doing fine for the most part (in terms of the general market but may not be in terms of specific holdings), buy any later generation traders and investors have been on a massive roller coaster ride.
If you look at a chart of the Nasdaq, things look much worse than the chart above (and even resemble a real estate price bubble ending 2005-2006).
And the S&P500 doesn't look much better.
After enduring large percentage declines not seen since the Depression of the 1930's, many traders and investors began to look for alternatives to the "buy and hold forever" theory and started coming up with "exit strategies".
There still are die-hard (or even new generation) long term buy and hold strategists that are out there and do well, but the methodology has changed greatly. From the initial stock selection process to monitoring and managing the position all the way through knowing when it's time to sell, either to admit defeat or take profits.
Having some type of exit strategy in place prior to entering any position goes a long way in providing good results over the long term in most cases.
Looking back at the DOW from about the years 1955-1982 in the first chart, I can imagine people were not too keen on the "buy and hold forever" strategy either as the market basically stayed between 500 and 1000 for a long 27 year stretch before breaking out. Still though, during that time period a Stockbrokers job was pretty easy just having to convince people to add to their positions continouously and eventually they could say they were right.
In more recent times though, 10%, 20%, 30% or higher gains can be obtained in short time periods, sometimes as short as 1 month so having an exit strategy in place to try and lock in profits is more important now than back in the 50's, 60's and 70's.
Keep in mind that in "some cases" buy and hold forever works buy can be very painful at times having to potentially endure large percentage declines, some of which may never reach pre-decline peaks.
Lastly, think about long term holders during the tech bubble ending in 1999-2000. Which would you rather have been: 1) a buy and hold forever investor or 2) an investor with an exit strategy in place with some type of stop loss?