Every Investment Needs an Exit Plan

Most investors focus entirely on potential returns while ignoring the most critical question: how and when will I get my money back? Having a clear exit strategy for every dollar you invest isn't just smart planning - it's the difference between building wealth and watching your money get trapped in illiquid investments that sound great on paper but never pay off.

Money Matters: Understanding liquidity vs. returns in your investment portfolio

Every investment decision involves two fundamental factors: liquidity and cash-on-cash returns. Liquidity measures your ability to access your money when you need it. Cash-on-cash return measures the actual dollars flowing back to you annually from your investment. Understanding this relationship determines whether your money works for you or gets stuck working for someone else.

Your investment portfolio exists on a liquidity spectrum. At one end, you have savings accounts and stock market investments…highly liquid but offering modest returns. At the other end, venture capital and private business investments offer potentially massive returns but lock up your money for years or decades.

The key insight: illiquid investments must offer significantly higher returns to justify tying up your capital. If you can make 10% annually in the liquid stock market, why accept 10% in a business investment that locks up your money for five years? The answer is you shouldn't. For illiquid investments, target minimum 20-25% annual returns to compensate for the liquidity sacrifice.

Even retirement accounts like 401ks and IRAs aren't truly liquid despite being "your money." Early withdrawals trigger heavy tax penalties, making these vehicles effectively illiquid until retirement age. This is why proper financial planning staggers investment vehicles based on tax advantages and compounding benefits, accessing less advantaged accounts first while letting tax-advantaged accounts grow longer.

Real estate occupies the middle ground…more liquid than private businesses but less liquid than stocks. A well-chosen property in a desirable location can typically be sold within 4-6 months, making it reasonably liquid while offering appreciation potential and possible rental income.

The critical mistake many investors make is getting emotionally attached to investments without clear exit strategies. Whether it's a friend's restaurant concept, a startup with an exciting mission, or a company whose products you love, emotion clouds judgment about realistic exit timelines and return potential.

Action Steps: Your systematic approach to evaluating investment exits