You’ve seen the news by now.
Tom Brady is back!
His retirement from football lasted all of 40 days. It’s clear he has some unfinished business on the field.
And, as investors, we can learn a thing or two from his exit (and return).
Among quarterbacks, Brady is the GOAT (greatest of all time). Those are fighting words in certain bars across the country. But I, for one, am excited that the Brady era still has another chapter or two left in it.
Let’s just hope that when the time comes, he knows when to quit for real.
And that’s where the power of the exit strategy (in investing or life) reveals itself.
First, let’s look at how not to do it using another great as an example, Michael Jordan.
Michael Jordan Whiffed on His Exit Strategy
Jordan first retired after winning three NBA championships. He then tried to play pro baseball before getting his head back in the game and coming back to win three more NBA rings.
And then it got weird.
Jordan retired from the Chicago Bulls a second time … only to come back again, two years later, with the Washington Wizards. Most basketball fans like to pretend those last two years never happened.
The Wizards never made the playoffs, and it was an undignified way for the greatest player of all time to finish his career.
Jordan should have retired on top.
While I’m not above a little sports nostalgia, this is an investment letter, not an ESPN Classic recap.
But there are some lessons to be learned here.
Know When It’s Time to Hang It Up
As investors, we also need to know when to quit.
Staying in a trade too long can turn a moneymaker into a money-loser.
Before you start a trade, you need to have an exit strategy with two elements:
- A point where you take profits if the trade goes the right way.
- A point where you cut your losses if things turn south.
There’s no “correct” answer here, and your answer may vary from trade to trade.
My Approach: An Exit Strategy for Any Trade
For example, I have a handful of dividend stocks that I bought years ago and pledge to never sell. My time horizon is forever. My heirs can sort it out. And in the meantime, I’ll continue to let the dividend payments compound into new shares.
I have other investments that I run in a model and I sell them when the weights are outside of my set bounds. This is basic asset allocation stuff. Nothing sexy. But there’s a model, and I stick to it.
And I have other investments still that are shorter-term speculations. I buy them with a specific target in mind and once I hit that target I sell half, letting the second half run. And I have stop losses in place in the event the trade goes the wrong way on me.
Each of these approaches are wildly different. But in each case, I have an exit plan. I know when I’m getting out, even if that answer is never.
I can’t tell you how many times I’ve seen an investor lose money on what was supposed to be a short-term trade, shrug, and say: “I guess I just became a long-term investor.”
Don’t do that.
That shows a lack of discipline that is all but guaranteed to turn small losses into large ones over time.
If you want to win the game of investing over time, you have to know when to walk away … and then you have to follow through.
Charles Sizemore, Co-Editor, Green Zone Fortunes
Charles Sizemore is the co-editor of Green Zone Fortunes and specializes in income and retirement topics. He is also a frequent guest on CNBC, Bloomberg and Fox Business.