Long Term Investing BAC
Understanding the Importance of Having an Exit Strategy
Here is an example of long term investing BAC showing the importance of using a good exit strategy. Many times long term investors get drawn into the concept of buy and hold and don't think about selling until their position has lost so much money that they can't psychologically endure the pain anymore. Sad, but true.
After having my personal investment assets at large full service brokerage firms for many years, I can honestly say that I never heard the words "Sell", not once.
As a matter of fact, when I sold the last of my Mutual Funds held at Merrill Lynch in 2002, they were worth 20 percent more than they would have been if I had listened to my broker and held them through today in 2009.
That would have resulted in a negative 20 percent return over 7 years.
At first glance, the example below of long term investing BAC (Bank of America) shows a nice extended long term move higher, until October 2007.
Let's take a closer look though:
- Let's assume that you thought you were darn lucky to have purchased shares of BAC for $11.00 in December 1994, and were a buy and hold long term investor. You were planning to retire in 20 years, so you would be holding this stock until then as it surely would appreciate in value over 20 years.
Well, as you can see by looking at the chart, 14-15 years later BAC is now trading near $5.00 per share. You now have an unrealized loss of about 55% of the amount you initially invested almost 15 years ago.
- As we look back, we can see that just 2 years ago, that same person who bought shares in 1994 had an unrealized gain of almost 400%. What a shame to have not had a good exit strategy in place all along.
Now let's take a look at some possible exit strategies that could have captured large portions of these unrealized gains.
The first chart below shows how long term support levels could have been used as an exit strategy when the stock broke down through these levels. The same person long term investing BAC who purchased in 1994 and used these support levels as an exit strategy would have sold their position in Mid 1998 and captured an almost 200% profit.
Looking at the same chart, you can see that a simple exit strategy of selling when the price breaks down through lower long term support levels could have produced two more profitable long term investing opportunities. Keep in mind I am trying to illustrate the possibilites of having an exit strategy in place and am not taking into account any other parts of an overall trading or investing plan, such as entry rules.
This is a simple example of an exit strategy, but as you see, could have produced profitable results several times over. The important thing to recognize is that there are ways to capture profits even when long term investing. Any long term investor using a simple method such as this, would have had a clear sign to Sell in early to mid 2007 before the large decline recently.
The next chart below shows another example of long term investing BAC using an exit strategy where you would sell your position using an approx. 20% trailing stop loss. The lines I have drawn are assuming buying near the bottoms and illustrate the 20 percent trailing stop and would be where you would sell your position if it crossed below the red line.
As you can see, these are two exit strategy examples which would have helped when long term investing BAC. By looking at past examples such as these, you can start to develop your own trading plan and help capture profits before they evaporate into thin air.
There are many other ways to develop an exit strategy such as using specific technical indicators, but a key thing to understand is that having some type of exit strategy is important whether you are a long term investor or short term trader.