Wednesday, September 3, 2008

Exit Strategy

One of the most important factors to consider when making any type of medium/long term investment is deciding on what your exit strategy is going to be.

This applies to any investment in a unit-linked fund, as the main asset classes, your money is invested in, are considered medium to long term plays.

It is all very well doing vast amounts of research on the level of risk you are willing to take, the time frame involved and deciding on which product/s are most suitable to your requirements; but you also have to consider the fact that at some stage you are going to need to call on the funds invested.

The best time to formulate an exit strategy is before you invest. Decide on some ground rules based on a few ‘What If?’ scenarios. For example, what if the investment is at break-even, at a loss, on target or ahead of target, after your initial target term for the investment has expired?

We all set out with the intention of making money, but sometimes things just don’t go to plan. The current unfavourable market conditions for property and equities can be a cruel reminder of what happens when your plan takes a set back.

Once you have a clearly thought out exit strategy for your investment, it lessens the likelihood that you are going to panic when/if things start going pear shaped. In other words, you had a plan B and you can now fall back to this, if circumstances dictate. This scenario emphasises the need for having short term cash deposits available to you.

On the other hand, you should also consider what you are going to do if your investment achieves or exceeds its intended target. Do you capitalise on the gains and exit or do you stay invested and review your position at regular intervals, having due regard for any tax implications?

It does not matter if you are investing directly or indirectly in property or equities, you have to decide, at outset, how you are going to exit. This may be at some distant point in the future but a consideration nonetheless.

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