Investor Psychology: Entry & Exit Strategies

There is no point becoming an investor if you don't invest. In fact, are you even an investor if you don't invest? You can have all the knowledge in the world, but with no application it's useless. 

Ships are safe at the harbour, but that's not what ships are for 😉

In this article I will be covering: a proven successful entry & exit strategy, setting goals for your investments / knowing when to take profits, and I'll be touching upon FOMO.

Entry Strategy

This is perhaps the best possible way to enter an investment. It's very simple, some of you may already be aware of it, but this post is essential for beginners and for the 'Investor Psychology' series, it's called 'cost averaging'.

So, let's say you have £1,000 and you'd like to buy an asset. There are two main ways you can go about it:

A) Buy £1,000 worth of the asset as a one time investment

B) Split your £1,000 into smaller segments (like 10 x £100) and buy over time. Eg. buy £100 worth every Friday for 10 weeks, totalling £1,000 invested.

For the most part, option B provides a much better entry (not 100% of the time, but the majority of the time). This is because as the price of the asset fluctuates (increases and decreases), you will be capitalising on different prices usually resulting in a lower average cost. Even better if an asset is in a downtrend as each time you purchase, you will be buying more of the asset for the same amount due to its lower prices!

For most people, the best way to cost average is to take a % of your monthly income and use that to buy an asset. So if you get paid £7,000 per month, you could take 20% (£1,400) and buy into an asset each month resulting in an average cost over time. 

If you already have some capital saved, eg. £10,000, and you'd like to use that instead of your monthly income, the same rule can be applied. Split up your £10,000 into smaller segments and invest over time (daily, weekly, biweekly, monthly etc.).

Refer to my article on 'Building An Income Plan' for some ideas on how to figure out how much you'd like to invest.

The fundamental idea of cost averaging is to acquire a lower 'average cost' which will allow for more profit in the long run. This is done through the methods stated above.

Exit Strategy

So, how do we cost average to exit?

Same idea, opposite direction.

Once you've acquired an amount of an asset you're happy with, there's no need to keep buying more. It is now time to patiently wait for the right time to exit the asset and sell off your position.

This is done through the same manor, cost averaging. 

So, let's say you have a £1,000 investment that has so far made you a nice 50% return, you're happy with this and you'd now like to sell your position. Apply the same idea and sell over a period of time (daily, weekly, biweekly, monthly, etc.). This will allow you to capitalise on the fluctuation of the asset, which may allow you to have your overall position increasing while selling smaller positions, (if the price is in an uptrend, of course), eg. if the price is increasing over the timespan that you're selling, each time you sell it will be for a slightly higher price which means slightly more profit.

Selling your whole position at once may result in missing out on extra profit. This isn't the end of the world and doesn't matter as much as cost averaging to enter, but it's a nice little method to get even more potential profit out your investment. This is NOT the same as FOMO.

Investment Goals (1/2 Of Your Exit Strategy)

It is essential to have an idea of what return you want out of an asset, otherwise you'll never know when to sell and could potentially miss out on very good returns. 

Look at the category of the asset you're investing into and look at the typical gains it comes with. Eg. index funds usually return 6-10% per year, crypto can return anything from 10% to 1,000%+.

Don't let crazy returns cloud your judgment though. Be reasonable and rational. It is important you understand how market cap works to have a basic idea of how much growth might be in your asset. Price means nothing, market cap is everything.

The price of an asset literally means nothing, it's all about market cap. I won't go into too much detail of exactly what market cap is right now, just understand that this is the most basic tool to gain an understanding of where your asset is in terms of growth.

If an asset's market cap is £500,000,000 and the market caps of other similar assets are around the £750,000,000 to £1,000,000,000 region, this is your first signal that it might have 50-100% potential growth in it (resulting in 50-100% potential ROI). 

As long as you have an idea of what ROI you're after, you will have an idea of when to start exiting an asset, this will help you lock in profits rather than lose them.

Combine your goal with your exit strategy and you have a sure way of making profit on your investments.

IMPORTANT: market cap isn't the ONLY way to identify potential growth, it's like a quick hack to see what % increase could happen, it's important to have a well rounded knowledge of fundamentals and technicals to make a more accurate growth prediction - I will cover this in future posts.

FOMO - The Death of All Retail Traders

As a beginner in the world of investing (especially in crypto), big gains can manipulate your thinking in a crazy way. 

You might see an asset shoot up something stupid like 200% and think, "If it's already gone up that much, it must have the potential to go even higher, I'll buy and make some quick money". 99% of the time this results in a loss of your capital.

If you've read my previous investor psychology post, you will have an understanding of how smart money works to capitalise off dumb money. One of their ways of doing this is through creating FOMO (Fear Of Missing Out).

Contrary to what you may think, most investors do not act rationally, they act emotionally. If somebody can get you to act out in an emotional state, they have control over you. 

The media will try to create FOMO as well with bullshit news articles. I'll cover the media in a future post.

Just understand this basic principle:

When an asset shoots up in price, it is time to sell. When an asset plummets in price, it is time to buy.

Obviously it's a little more complex than that ^, but that's a basic rule of thumb.

Never chase quick gains in investing, patience is one of the most key elements in this game.

Have a blessed day everyone 💎