Do You Have an Exit Strategy?
Planning for long term investment success
Rich dad often said, “The reason why most average investors lose money is that it is often easy to invest into an asset, but it is often difficult to get out. If you want to be a savvy investor, you need to know how to exit an investment as well as how to get into one.”
If there’s one thing a lot of amateur investors learned from the last housing boom and bust, it’s that you have to have an exit strategy. When I speak at events, I talk to countless people who are underwater and overwhelmed by real estate they purchased at the peak of the market on the assumption that real estate always goes up.
Now, they’re stuck with a liability they thought was an asset. They can’t sell it, and it just sucks money out of their pockets each month.
The importance of the exit strategy
When I invest, one of the most important strategies I consider is my “exit strategy.” To help me understand the importance of an exit strategy, rich dad put it in these terms:
“Buying an investment is often like getting married. In the beginning, things are exciting and fun. But if things do not go well, then divorce can be much more painful than all that initial fun and excitement. That is why you must really think about an investment almost like a marriage. Getting in is often a lot easier than getting out.”
Rich dad’s point was not to encourage divorce, but rather to impress on me the importance of thinking long term.
As rich dad said, “The odds are that 50 percent of all marriages will end in divorce, and the reality is that nearly 100 percent of all marriages think they will beat those odds.”
When you’re in love, you overlook a lot of bad habits and annoying personality traits. You look at the world through rose-colored glasses. It’s those who ignore the signs of trouble and rush into a relationship that most often have heartache down the road.
There’s no difference when it comes to investing. Many investors become infatuated with an investment opportunity and rush in to snatch up what they think will be a great deal. They give no thought to the exit strategy, and what they are left with is tied up equity at best or huge loses at worst. As Elvis says, “Only fools rush in.”
Rich dad’s best words on the subject were, “Always remember that when you are excitedly buying an asset, there is often someone who knows more about the asset who is excitedly selling it to you!”
Every business plan we look at must have an exit strategy in place. Otherwise, Kim and I trash it right away.
All sorts of hype can be made about an opportunity—and that hype often lures amateur investors in. But it takes real numbers and knowledge to present a plan that includes an exit—and a return on investment from that exit. And it takes an investor with financial education to be able to know if that exit strategy is sound. The more sophisticated your investment is, the more important the exit strategy.
One great way to learn about exit strategies, and to gain experience is through games. That is why I invented my board game CASHFLOW. When you play CASHFLOW, you learn the technical skill of when to buy and when to sell.
If you’re interested in learning more about this skill, I encourage you to play CASHFLOW for free online at richdad.com. There you’ll also find other games we’ve developed to help you become a successful investor. It’s fun, and it’s educational. Best of all, it’s a great investment that only costs you curiosity and some time.