🧠 When are you selling your investments ?

When people talk about investing, they often focus on strategies for getting started and growing your money, but what about knowing when to exit?

Is it better to wait until the last minute to sell, or should you gradually withdraw your funds years in advance?

If you haven't thought about an exit strategy yet, today's email will help you understand what elements are crucial to plan ahead.

Step One: Building a pyramid

A good investment strategy rests on three key pillars.

The base: your objectives, answering the question of why you invest.
The middle: your plan explaining how you'll take action.
The top: the regular actions that will help you reach your goals.

The foundation of any successful investment strategy is knowing why you're investing. When you establish clear goals with specific amounts and timeframes, you give yourself a framework for making smart decisions.

Each financial goal demands its own strategy: saving for an apartment (5 years), building a retirement fund (30 years), or purchasing a motorcycle (2 years) all work differently.

For instance, properly defined goals might be:

"I need €50,000 for an apartment down payment by 2030."

"I want to secure €1,000 in additional monthly income for retirement by 2050"

"I need €4,000 to buy a motorcycle within 24 months"

And here's a vague objective with no amount or timeline:

Without a timeframe, you simply can't create an exit strategy 🙂 

Many people avoid setting specific dates because they think they need to be precise to the day. That's a mistake. What matters is having a target timeframe that gives you direction and purpose.

It's perfectly normal to adjust your timeline as life changes. A salary increase might speed up your progress, while health issues might slow you down.

Remember, the whole point is to fund your life goals, not just pile up money that never gets used.

What's the point of being the richest person in the graveyard?
Investments should fund your life, not just accumulate forever 🙂 

Step Two: The plan

Using our example of saving €50K for a down payment in 5 years, let's break this down practically:

• How much do you need to save monthly to hit this target?

• Where should you put this money? Are there tax-advantaged accounts that make sense to open here?

• If markets drop, do you see it as a buying opportunity? Or does it stress you out too much?

• Most importantly for today: how will you exit your investments when it's time to use the money?

Here are key principles for creating your exit strategy:

1. Never wait until the last minute

When you have investments in the stock market (whether through individual stocks, ETFs, or mutual funds) their values can experience significant volatility.

Picture this: you're only three months away from needing your down payment when the market suddenly plummets... Talk about terrible timing! 🙃 
That's precisely why planning your exit strategy well in advance is so important.

2. Gradually reduce risk as your deadline approaches

As you get closer to needing your money, start moving portions of it to safer options (savings accounts, term deposits, money market funds).

This is called a "de-risking" strategy.

For our real estate down payment example with a 5-year timeline, this might look like:

• 5 years out: 100% invested according to your risk tolerance

• 3 years out: Begin securing 20-30% of your investment

• 2 years out: Up to 50% in safe investments

• 1 year out: 70-80% secured

• 6 months out: Almost everything in safe investments

(These are just examples to illustrate the concept, not personalized advice!)

Markets can take years to recover after downturns, as we saw in the previous newsletter and this is why this gradual approach matters.

That said, some people wouldn't be comfortable investing in the stock market at all for a 5-year goal, and that's perfectly valid too. Your investment strategy should always align with your personal risk tolerance 🙂 

Looking at retirement planning with a 30+ year horizon allows for a different investment approach:

• First 20 years: Comfortable with 70-90% in growth-oriented investments
  (If this exceeds your comfort level, a more conservative approach works too)
  

• 10-20 years before retirement: Scale back to 50-60% in growth investments
  

• 5-10 years out: Continue securing more funds (30-50% in growth investments)
  

• 2-5 years out: Get increasingly cautious (20-30% in growth investments)
  

• Final 2 years: Secure funds based on your risk comfort (under 20% in growth investments)

Remember, these percentages are just examples.

You'll need to decide your own comfort level with timing and risk, based on your financial situation, risk tolerance, and goals.

Finding all this a bit much to handle? Consider talking to an independent financial advisor who can provide personalized guidance 🙂 

3. The Time Bucket Strategy

This simple but powerful approach divides your savings based on when you'll need the money:

• Short-term bucket: Money needed within 1-3 years
  → Keep in ultra-safe investments

• Medium-term bucket: Money needed in 3-10 years
  → Moderately risky investments

• Long-term bucket: Money needed beyond 10 years
  → Growth-oriented investments with higher potential returns

Let's apply this to our examples:

Motorcycle purchase in 2 years: This is clearly short-term, so all funds go in the "short-term" bucket.

In practice, use a savings account or term deposit. Zero risk, zero stress. You'll know exactly what you're saving each month without worrying about market swings.

The returns won't be exciting, but with such a short timeline, safety is more important than growth.

Real estate down payment in 5 years: This medium-term goal might use a two-bucket approach:

• Now: 70% in diversified investments with some growth potential, 30% in safe options

• 2 years in: Begin shifting to reach a 50/50 split

• 3-4 years in: Move to 70% safe investments, 30% growth investments

• Final year: About 90% secured

This approach captures better returns early on while protecting your money as your deadline approaches.

Retirement income in 30 years: With this long-term horizon, you can be more growth-focused:

• First 20 years: 80-90% in growth investments

• 10 years from retirement: Begin reducing risk (perhaps 60-70% growth, 30-40% safe)

• 5 years out: Further reduce risk exposure (30-50% growth, 50-70% safe)

• Final 2 years: Lock in your gains (10-20% growth, 80-90% safe)

The beauty of the bucket strategy is how it helps you visualize and manage different goals separately, each with its own timeline and approach. Money gradually shifts between buckets as deadlines approach.

And again, these percentages are just examples 🙂 

Someone who's very risk-averse might secure funds earlier or allocate more to safe investments, while someone more comfortable with risk might take a different approach.

What about taxes?

I mentioned this briefly earlier, but here's a crucial point: tax implications significantly influence your exit strategy.

Each country across Europe has its own unique approach to taxing investments, which can dramatically affect your returns.

These differences mean that identical investment strategies can yield vastly different after-tax results depending on where you live. The smartest move you can make is to research the specific tax rules in your country.

Questions to research for your situation:

1. Tax-advantaged accounts: Does your country offer special investment accounts with tax benefits?

2. Holding period benefits: Are there tax reductions or exemptions for holding investments longer than a certain period? (As in Slovakia's 1-year exemption or the Czech Republic's 3-year rule)

3. Annual allowances: Is there a tax-free amount of investment income or gains you can receive each year? (Like Germany's Sparerpauschbetrag)

4. Treatment of different investments: Are stocks, bonds, funds, and real estate taxed differently? (As in Italy's lower rate for government bonds)

5. Treatment of dividends vs. capital gains: Might it be more tax-efficient to focus on growth or income in your country?

6. Pension-related incentives: Are there tax advantages for retirement-focused investments?

Tax rules change frequently. A strategy that's tax-efficient today might not be tomorrow, so it's worth staying informed about upcoming changes.

Your local tax authority's website, a qualified financial advisor, or tax professional can provide guidance specific to your country and personal situation.

The bottom line? Tax considerations should never be the only factor driving your investment decisions, but understanding them will help you maximize your after-tax returns and avoid unpleasant surprises when it's time to exit your investments.

I hope this newsletter has given you some practical ideas for developing your exit strategy!

Any questions? Just reply directly to this email, I answer all emails 🙂 

Take care,
Nessrine

Important reminder: This content is educational only and not investment advice.
Do your own research before investing. Remember that all investments, including ETFs, carry risk of loss.