Exit Strategy Comparisons
How does SmartStops stack up against buy and hold and other commonly used exit strategies?
We conducted three studies looking at 10 years of market history. The first study
tracks investments in all S&P 500 stocks and analyses drawdown risk exposure
comparing SmartStops to buy and hold. The second study tracks and analyzes the NASDAQ
100 stocks over the same period. The third study tracks an investment in the SPY,
an ETF designed to mirror the S&P 500, and returns risk/reward analysis comparing
SmartStops against buy and hold as well as 8%, 25%, and MACD exit triggers.
The results may surprise you.
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Performance Studies
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Common Exit Strategies
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SmartStops vs Buy & Hold
How risky is a buy and hold strategy? When taking a buy and hold approach you are
in the market 100% of the time and gain the benefit of any rise, but also experience
the worst of each down trend. One measure of risk is the size of the
experienced over a period of time.
Our analysis shows that buy and hold investors are exposed to significantly more
drawdown risk than SmartStop users.
S&P 500 10 year risk analysis
Click to view a table of the full analysis
NASDAQ 100 10 year risk analysis
Click to view a table of the full analysis
SPY 10 year risk reward exit strategy comparison analysis
Click to view the complete analysis
For this analysis, we ran a 10 year simulation using the SPY ETF, one that is designed
to mirror the S&P 500.
The results demonstrate that while using SmartStops may increase your trades, you’ll
achieve significantly greater risk control with less effort and greater benefit.
Exit Strategy Techniques
The concept of exit strategies has been around for a long time. And there are a
variety of exit strategy methods, which include:
Buy-and-Hold
Buy and hold is really not an exit strategy. It is a philosophy that believes
will even out over the long term in a diversified portfolio
of high-quality stocks. In other words, hold a good stock long enough and you will
make a profit, including the recovery of any losses accrued over the short and medium
term.
Concerns with buy-and-hold
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Investment funds are continually tied up.
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You may not have a long enough investment horizon to ride out down markets.
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Losing stocks in a buy-and-hold portfolio can offset winners.
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There are clearly times when a stock should be sold, but if investors are not
paying attention opportunities to mitigate risk will be missed.
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Sell decisions are often influenced by emotion and other factors that lead investors
to make irrational decisions.
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Buy and hold is often the default consequence of not having an effective exit
strategy.
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Many investors simply become dependent on buy-and-hold because they lack the time,
experience, and resources to establish an effective strategy. SmartStops are a superior
alternative to buy-and-hold because it allows quick, accurate response to market
fluctuations that erode profits or result in unexpected losses. Selling instead
of holding through downtrends allows you repurpose funds and achieve greater returns.
Trailing Percentage Stops
Concerns with trailing percentage stops
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Trailing stops do not adjust to changes in market direction and volatility. They
only adjust in one direction—up. This often results in premature exits or the whipsaw
effect.
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As stock prices climb, stops based on percentages move too far away from the price
and fail to protect profits. In other words, a 10% exit on a $10 stock is not the
same as a 10% exit on $100 stock or a $200 stock.
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Once a percentage exit point is reached, new stops are not automatically calculated.
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Broker Recommendations
Brokers are often better at suggesting when to buy than when to sell. Moreover,
the brokerage business faces natural hurdles to the sell evaluation and execution
process.
Concerns with brokers
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Successful brokers may have 500 or more active clients with large portfolios.
This means monitoring thousands of stocks to maintain exit strategies—a very time
consuming task even with automated tools.
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Brokers often lack training on exit strategies and seldom have the tools needed
to closely follow trends and take decisive action when it counts. Unfortunately,
it is not uncommon for brokers to suggest selling a stock only after bad news or
when they want you to buy something else.
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Even if brokers had the time, knowledge, and tools to closely monitor stocks,
it would be impossible for them to respond with timely exit signals for every client.
Do you know where you are on the priority list when your broker decides its time
to sell?
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SmartStops provides an objective, analytical perspective that can augment broker
recommendations. Your broker can use SmartStops to achieve more consistent results
and a higher total return on your investments. Have your broker
contact us to learn
more about programs designed for them.
Technical Analysis
Concerns with technical analysis
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For the average investor, TA is simply too complicated to master and apply
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Technical analysis is more suited for traders who are willing to commit the time
required to use it properly
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There are a variety of components such as moving averages, moving average convergence/divergence
(MACD), trend lines, support/resistance points, and Fibonacci retracements that
need to be considered when using TA to create exit points
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SmartStops incorporate TA, proprietary analytical models, and years of market experience
into a tool that is easy to use for any investor regardless of knowledge or skill
level. It can serve as a guide to the casual investor as well as complement the
efforts of a seasoned technical analyst.
