ETF Exit Strategy Considerations: When Do You Get Out?

I have to admit that the massive decline in values for most, if not all, exchange traded funds back in 2008 and 2009 got me thinking about exit strategies. At the moment I'm relatively young, gainfully employed, and I have a comfortable cash buffer. However, I can see a day when I'm old, not so gainfully employed, and scared about about being in the market during a major crash. As someone who likes to be prepared, I've spent considerable time thinking about just what needs to be considered when it comes to an exit strategy for ETFs.

First, an assumption that I will continue to invest in equity ETFs. If my portfolio at some point becomes 100% bonds or treasuries, for example, then there's not much point in worrying about an ETF exit strategy.

Second, this is my thinking phase. Before doing research and reading the thoughts of others, I wanted to see if I could work out the various pieces of the puzzle. I find this approach makes the research more informative.

Stock Market Factors to Consider

The stock market is full of signals both for buy and for selling. The problem is that most investors, professional and amateur alike, aren't good at consistently interpreting these signals correctly. However, I was thinking that some simple ones to consider for an exit strategy are

1. The moving averages e.g. 200-day moving average which is sufficiently long enough to smooth out short-term spikes and dips.
2. Performance relative to other sectors. That is, a holding moving in lock step with the overall market is probably less risky than a high-flying holding.
3. Duration for which the sector has been outperforming. Since cycles exist why not acknowledge that outperformance can't last forever?

Economic Factors to Consider

Often lagging what's happening in the “real” world, the stock market isn't necessarily a good indication of the economy as it exists today. For instance, there were cracks showing in the mortgage industry well before those cracks were reflected in the prices of mortgage-related equities. So I think it's important to look for warning signs within the economy itself. Of course, you may end up getting out of the market too early, but I don't think many people would be complaining had they got out even a year before the recent crash.

Personal Factors

And of course everyone's situation is going to be different. Your expected need for the money you're investing is going to play a big part in determining how much stock market turmoil you're able to tolerate. For my purposes, I'm assuming that the money will be needed within 10 years. A somewhat long time, but perhaps not long enough to ensure that a portfolio decimated by a crash has had time to recover.

In future posts I hope to look at actual exit strategies that others have devised with the ultimate goal of identifying an approach that suits me. If you happen to already have one you like, please do share in the comments below.