Make Sure Your Investment
Decision-Making Is Inside-Out

[It's been three years since we last published this article, explaining why you should not let current market behavior drive your decision-making. We've referred back to it many times, and feel it warrants reprinting for the benefit of our newer readers. We ask the indulgence of SMI veterans who, hopefully, have long since learned to put its principles into practice. - AP]

One of the more contra-intuitive propositions that we regularly put forth in these pages is the idea that one's investing decisions can usually be made with little regard for what's currently going on in the investment markets. Let us once again make my case, and then we'll apply it to the question of deciding whether now is a good time to sell some or all of your stock holdings.

Typically, where do ideas for your investment decisions originate? For many investors, the starting point of the process is found in the impersonal "outside" world of current events, magazine articles, and brokers' recommendations. Their decisions are primarily guided by outside considerations. As they respond to all the data thrown at them—sometimes buying, sometimes selling—their personal "inside" financial worlds take shape. Their thinking is "outside-in." They need a continual stream of news and information to provide stimulation and provoke them to action. Decision-making would be impossible without it.

For other investors, the starting point of their decision-making is "inside" information. The focus is on their own financial needs and a personalized long-term strategy designed to meet those needs. Their buy/sell decisions are made based on what's required to make sure their financial holdings are in accord with the game plan. The "outside" world of investment professionals comes into the picture only because assistance is needed in executing decisions already made. This is "inside-out" thinking, where decisions are primarily shaped by inside considerations. Thus, current market fads, trends and so-called expert opinions are largely irrelevant to inside-out investors. As you have probably guessed by now, we're encouraging you to be an inside-out thinker.

In other words, make your investing decisions like you do other consumer purchasing decisions. For example, if your family has grown to the point you need a spacious minivan to haul everyone around, you wouldn't buy a new Ford Mustang convertible instead merely because an article in Money magazine said they're "hot" at the moment. Or, if you need a medicine that lowers your blood pressure, you wouldn't let a glowing recommendation from your druggist convince you to bring home the leading antihistamine for allergies instead. It would be foolish to let irrelevant external influences (outside-in thinking) steer you into making such inappropriate purchases. Instead, you make your decisions based on your needs at the time, irrespective of what the marketplace would like to sell you.

This is obvious, you say. Yet, many people have a difficult time applying this consumer mindset to their investing decisions. One of the most frequently-asked questions these days is a variant of "Oil prices and gold are sky high, and I've read where many experts are sounding an alarm about stocks. Should I sell my funds?" These folks may decide whether to reduce their stock holdings depending on how volatile the market has been, what the business magazines say, what the Federal Reserve may do to interest rates, or—heaven help them—what our best guess might be. Outside-in thinking will never tell you whether it's a "good" time to sell stocks because no one knows what the market will do in coming months (as evidenced by the continual reporting of conflicting opinions from Wall Street's bulls and bears).

Here's a checklist an inside-out investor might run through in deciding the "Is it a good time to sell?" question.

Is my financial foundation still rock solid? That is, am I still debt-free (Level 1) and is my contingency fund (Level 2) still sufficient? If not, I should sell enough stock (or stop contributing to my 401(k) plan long enough) to repair the cracks in my foundation.

Are my earlier assumptions about my lifetime earnings, retirement and lifestyle goals, health needs, life expectancy and emotional tolerance of risk still acceptable? If in doubt, I should once again run the numbers in the retirement planning worksheets . The results might dictate a change in my portfolio mix between stocks and bonds (5 Easy Steps to Start Investing the SMI Way).

Are my protective boundaries still in place (see Biblical Blueprint bonus report )? If not, what adjustments should I make at this time? For example, I sacrifice needed diversification if more than 15% of my total investment portfolio is in the company stock of my employer. In that case, even if I believe my company's stock will do well in the future, it's probably wise to sell the excess and reinvest the proceeds in other assets.

Am I meeting my giving goals? If not, perhaps I should make lifestyle adjustments or sell some of my stock holdings in order to fund my giving. (see The Eternity Portfolio )

Notice that the focus is on the personal needs and circumstances of the individual, not on the headlines of the day which almost never tell you anything that will enhance the quality of your decision-making. While current events may provoke you to run through your personal list of review questions, they should not dictate the answers.

• The Importance of Inside-Out Thinking 
• Learn about the SMI Investing Strategies
• SMI Investing Principles page
• Your Most Important Investing Decision 

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