exit strategy

Have an Exit Strategy


FSA’s investment philosophy is based on 2 key concepts:

  1. Follow the Money
  2. Have an Exit Strategy.

In this video, Ron Rough, FSA’s Director of Portfolio Management explains how FSA uses an Exit Strategy to help protect client portfolios.

have an exit strategy transcript

Hello! This is Ron Rough with a Technical Tuesday video.

Our investment process consists of two broad concepts:

  1. Follow the Money
  2. Have an Exit Strategy.

Today we’re going to talk about that second concept. The concept of an exit strategy is really the cornerstone of our investment process and simply put, it just means that we are willing to sell each and every position that we have in a portfolio, if that position starts to lose money.

As we all know, no investment goes up all the time. Losses are as much a part of investing as are gains. Unfortunately losses have an out-sized impact on your portfolio.

If you think about Warren Buffett, and if we follow his advice, his number 1 rule of investing was “Don’t lose money.” And his number 2 rule was “Don’t forget rule number 1.”

have an exit strategy: the math of losses

And if you think about the math of losses, you’ll understand why. A 30% loss in an investment has to be made up by gaining 43% just to get back to where you are. A 50% loss has to be made up by 100% gain.

And if you’re taking money out of your portfolio, it’s even more challenging. Take that same 30% loss to your portfolio. If you’re also taking 4% each year out of that portfolio, your portfolio has to make 63% over a three year period just to get back to even. That ends up being about 20% per year.

have an exit strategy: diversification works…until it doesn’t

Now most firms use diversification as a way to mitigate the losses that would come from any one single investment. As you can see from this chart most of the time it works. When one thing is going up, another area might be coming down. But overall they balance each other out.

However they work until it doesn’t work. In 2008, for example, you can see that almost every asset class fell quite a bit and there was really no place to hide during that bear market.

The tools we use to implement our exit strategy are primarily the FSA Safety Net® as well as inverse funds. In future Technical Tuesday videos, we’ll delve into those two tools more closely.

If you have any questions about the content of this video, please email or call us. And until our next update, this has been Ron Rough. Thank you for watching, and happy investing!

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