Exit Strategies

Your exit strategy depends on your investing goals and your tolerance for risk of loss. An exit strategy should be based on the question ‘what is the worst thing that can happen?’
Personally, I am risk averse and like to sleep at night, so my entry strategy is low risk to begin with, which makes my exit strategy easier. When I assess a possible investment, I look at the worst case scenario first. If that doesn’t look too bad I proceed to the next step.
For example, some people don’t mind to use every single cent of their equity or LVR (loan to value ratio) to aquire an I.P or shares or whatever. This leaves less ‘wiggle room’ in the event of a problem occuring.
As an example, banks generally don’t like you to have more than an 80% LVR, so they quite often won’t lend you funds higher than that without mortgage insurance. This means that they think above this figure is risky. If you can only invest using mortgage insurance, so be it. Keep in mind that it is a more exposed position so your investment selection needs to be even more careful. I find this too scary, but I am fortunate not to have to need M.I.
Therefore, for me; an LVR of 60% is my limit. I don’t invest unless I can stay at this level or there abouts.
This means if I have to sell in a hurry I won’t lose money and my very fragile sleep pattern will stay intact.
Another example of an exit strategy is a ‘flipper’ who tries to time the market. Their exit strategy may be to hold a property for only 12 months and sell in a rising market and pay minimal cgt.
This is not my strategy – I want to buy and hold, but be able to access the increasing equity for further investing, so the right type of loan to allow me to do that is important.

Cheers,
Marc.
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