Many investors follow an "outside-in" approach to investing. They make decisions based on hot tips, current events, and the like.

A more fruitful approach is one that's "inside-out," as SMI's executive editor Mark Biller explained yesterday on MoneyWise Live. Mark and host Rob West also answered questions from callers. 

The audio is posted below. Scroll down for a transcript.

MoneyWise Live airs weekday afternoons on Moody Radio. A different version airs weekday mornings on American Family Radio.

For more radio appearances by members of the SMI team, visit our Resources page.


Transcript

Rob West:
Hi, I'm Rob West. Many of the decisions we make affect us far into the future, especially investing decisions. Today, I'll talk with Mark Biller about a kind of decision-making that yields the best results.

And then it's on your calls at 800-525-7000. This is MoneyWise Live — biblical wisdom for your financial decisions. (theme music ends)

Well, Mark Biller is back with us today. He's executive editor at Sound Mind Investing, where they've made a science out of decision-making. <chuckle> Sound Mind investing is also an underwriter of this program. And Mark, great to have you back with us.

Mark Biller:
Thanks, Rob. Good to be back with you.

Rob West:
Mark, we often think of investing decisions as maybe good or bad, but I know you want to talk about something called "inside-out" decision-making, so perhaps you can begin with what exactly that means.

Mark Biller:
Yeah, sure. Well, it starts out with a different way of thinking about how we make investment decisions. You know, at SMI we try to teach our members that they can make most of their investing decisions really with little regard for what's happening in the investment markets right now. Now I know that that sounds maybe a little crazy in the middle of a bear market <laugh>, but I'm gonna lay out our case and let your listeners decide.

Rob West:
Okay, fair enough. You have the floor, sir. Go right ahead,

Mark Biller:
<laugh> Okay, well, to start out, we're asking the question, where do investment decisions come from? For most investors, and I think for most people, at least for many people, their starting point is the outside world. This is current events, what the market's doing, articles they're reading, talking heads on TV, all that kind of stuff. We can kind of sum all of those things up to say that for a lot of investors, their decisions are guided primarily by outside considerations. And then as those investors are responding to the data and the opinions that are constantly coming at 'em, their personal inside financial world begins to take shape. But it's taking shape based on this thinking that's "outside-in." So it's this outside information that's really driving their thinking and their actions.

And I think that the fact that a lot of people invest this way is one reason why you see so much herd behavior in markets because everybody's reacting to the same data, the same things that are happening in the markets.

Rob West:
And naturally, when this is the case, the decision-making is only as good as the outside information that's coming in, right?

Mark Biller:
Yeah, that's absolutely right, Rob. And that can be a big problem as we've, we've seen a number of times this year. Now I wanna contrast that way of thinking with a different set of investors. And this is how we're trying to help our SMI members think for this group, the starting point of their decision-making is inside information. What I mean by that is the focus is on their own financial needs, their own personalized long-term strategy. And so they're buying and selling decisions are just based on what's required to ensure that their financial holdings are in accordance with their long-term plan.

So if we contrast these two, the first group had this outside-in model, whereas what we're trying to shoot for is an inside-out way of thinking — in other words, their decisions are primarily shaped by these inside considerations. And if you can start to think this way, it makes what's going on in the markets right now and what the experts are saying pretty irrelevant to your investment decision-making. So in this model, Rob, the outside world of investing experts really only comes into the picture when somebody needs assistance executing decisions that are part of their long-term plan.

Rob West:
Well, that's kind of a breath of fresh air, especially in a market like this — and it's probably not unlike how we make other decisions in terms of our spending, right?

Mark Biller:
Yeah, that's exactly right. You know, if your family has grown to the point where you need a minivan, then you wouldn't see an ad on TV for a sporty little convertible telling you how great those are and change your mind and buy the convertible instead. And while that's a pretty common sense thing for most of us in the consumer purchasing side of our brain, somehow when it comes to investment decisions, we go a little haywire because we can kinda have an idea of what we need to do financially, but then we listen to somebody who sounds really smart on TV or read an article by someone who has a really convincing financial argument about why a certain investment is great, and all of a sudden our thinking can get all squirrelly and we can get led off track by the shiny object instead of what we really need for our own personal plan.

So that's really what we're talking about here, Rob — making your decisions based on your needs regardless of either what's going on in the market, what the experts are saying, all that kind of stuff.

Rob West:
Yeah. And that's pretty intuitive — and I guess a lot of folks might even say that's pretty obvious to us.

Mark Biller:
Yeah, it is. And it should be. And yet, we see all the time that people have a lot of trouble applying that mindset to investing decisions. You know, we're so influenced by what the market's been doing lately — and I mean, you don't have to look back very far, just the last, you know, several days of trading. We have huge up days followed by huge down days, and it's a lot for investors to process — and certainly, it's very easy to get blown around all over the place by this type of volatility, which is very typical in a bear market.

People haven't had to navigate a deep bear market for a long time. The last one was in 2008. That's a lifetime ago for a lot of investors. So getting some good counsel and having some, some kind of sane, calm voices in your ear instead of trying to figure this out on a day-to-day basis on what the market is doing is, is definitely recommended.

Rob West:
All right. Well, let's get pretty specific here. I know you take a deeper dive into this in the article we're referencing — what should an inside-out investor be thinking about before making investment decisions right now?

Mark Biller:
So the first one I would ask is, "Is my financial foundation rock solid?" In other words, am I debt free? Is my emergency savings fund adequate? And if not, then those would be good inside-out reasons why a person might need to sell some stock or maybe pause contributing to their 401(k) plan for a little while in order to repair the cracks in their foundation.

Another question to ask is, "Are my earlier assumptions about my lifetime earnings, my retirement goals, life expectancy, all those sorts of things, are those still on track?" We're talking about financial-planning-type goals here, retirement goals. And if you're in doubt on that, it's a good idea to rerun those numbers periodically.

And that's another type of exercise where you might get an inside-out result that would dictate that you might make some changes to your portfolio mix, either between stocks and bonds or maybe changing the rate at which you're saving — those sorts of things.

So again, Rob, we're talking about these inside factors that are personal to you as opposed to, "Look at what the market's doing! I'd better react to that." That's what we're trying to avoid.

Rob West:
Yeah, much better approach. All right, there's more questions that will move our way through related to how we can gauge whether we're thinking inside out.

Mark Biller:
Yeah, another one of these questions, Rob, is, "Is my investing strategy, my approach, does that reflect an appropriate risk tolerance — my own personal emotional tolerance for risk?" And that's a really important one — and it is something that a bear market like we've been in can kind of reveal in a way that maybe a survey <laugh> is lacking. You know, when the rubber hits the road, you really realize if you're taking on too much risk and, and you're having trouble sleeping at night or whatever.

Now, one caveat that I'd throw out here is you do want to be careful making big changes to your investing plan in the middle of a bear market. So you want to be careful with this one. But the overall idea, Rob, is that you would build a portfolio that you can ride through a bear market and not have to make big adjustments. And getting to that point may lead you to alter your strategy a little bit.

You know, at SMI we have a few different [strategies]. So for our members that might mean moving a little bit from one strategy to another. I know that's a little bit different for folks who aren't using multiple strategies like that. But a good thing to be focused on is your own personal risk tolerance and are you at a "sleep well" level of risk with your portfolio.

And then the last one I would throw out there, Rob, is, "Are my protective boundaries still in place? And if not, what adjustments should I make?" So one example of that might be that if you've got more than 10% to 15% of your portfolio in the stock of your employer, that can be a very risky thing — even if you think your employer's great. You know, that could be an inside-out reason to make an adjustment to sell some of that employer's stock and diversify that by reinvesting it in some other assets.

So those are a few more of those questions. Again, getting our focus off the market and onto, "What do I need from my plan to succeed?"

Rob West:
Yeah, that's really helpful. And again, if you wanna revisit those questions or read this entire article, you can do that at soundmindinvesting.org. The article is entitled, Make Sure Your Investment Decision-Making is Inside-Out.

800-5250-7000 is the number to call. We have some lines open for you. Let's begin in Jefferson City, Missouri. Peter, I understand you have an I-Bond question. Go ahead, sir.

Caller:
Yes, sir. Thank you Rob for taking my call. My question, well, I had some real estate property and I've sold it and now I have a little money. So my question is the best broker for inflation bonds. I don't — I'm not an investor. I really don't know where to go, what to do.

Rob West:
Yeah. And [how much are] the proceeds you're looking to put to work from this property?

Caller:
40 to 50 [thousand].

Rob West:
Okay. Unfortunately, you're not gonna be able to put all that to work [in I-Bonds] and there's really only one place to go to get it. Mark, I know you're a fan of the I-Bond. Go ahead with your thoughts.

Mark Biller:
Yeah, I'm a big fan of 'em right now. And the reason I say right now is because they are paying a really attractive yield. I-Bonds are inflation-protected bonds. So there's basically an inflation adjustment that's made every six months to the rate that these bonds pay. And with inflation as high as it's been, that rate is very attractive. It's over 9% right now. And even though that's going to adjust down almost certainly here in the months ahead it still should be a pretty attractive yield. Certainly much better than anything else we've seen in the bond landscape for quite a while. So I really like I-Bonds.

Now, what Rob was alluding to there is there are some restrictions on how much you can put in those. An individual is limited to $10,000 per year unless they are putting some tax refund money to work, in which case it can be a little more.

Now if you're married, if you have a spouse, then you could effectively put $20,000 in for this year and potentially as much as another $20,000 in early next year. So there are some ways to work around these limitations, but that is something to keep in mind.

And it only works for taxable accounts. Unfortunately, you can't use IRAs, 401(k)s, those types of plans, with I-Bonds. But if you have a plain old taxable savings-type account, then you can put that money in through TreasuryDirect.gov and set up your account directly with the Treasury that way. They're a great option. Rob, you have thoughts on that?

Rob West:
No, that's exactly right. You do have to leave it in for a year and you can pull it out after that with a small penalty if it's less than five years. But to your question about brokers, Mark's exactly right. There really is no need to go anywhere because you can't buy them except directly from the Treasury — one place to go: TreasuryDirect.gov. You'll set up your account there and then you'll transfer the funds in electronically from that website.

Sioux City, Iowa. Stephanie, you're next on the program. Go ahead with your question for Mark Biller.

Caller:
Hi there. So I've got about $13,000. That's pretax money, and I don't know if I can say where it's at or not, but it's like an annuity where I will never lose money, only gain.

Rob West:
Okay.

Caller:
So to me, that's very secure. But my work does not offer me to go to this program, and so I would like to put about 15% of each paycheck into this, but then that would be post-tax dollars so that I'm mixing money.

Rob West:
Okay. So you'd like to continue to put money into an annuity on your own beyond what you have in there inside a retirement pre-tax vehicle. Is that right?

Caller:
Yes, but then the money that would have to come out of my bank account, which would be post-tax money.

Rob West:
Yeah. Mark, thoughts on this in terms of continuing to fund through the annuity?

Mark Biller:
Yeah, so a few things. One, typically if you're wanting to do something along these lines, Stephanie, you probably would be able to set up a separate account that would be treated differently for tax purposes — much like somebody who has an IRA but maybe they're over their IRA limits could set up a taxable account and continue to fund investments that way.

But I would also just be a little bit careful with that one. We have not traditionally been big fans of annuities generally because they tend to have pretty high expenses. So that that safety that you're getting, there's a good chance that you're paying a lot for those features and for that safety. So I would just encourage you to take a really good look at the terms of the annuity and there may be some ways that you could put together a similarly safe portfolio while paying lower fees. That's a tricky thing to get into, you know, over a conversation like this. But through a conservative mix of bond funds perhaps you know — you have to look at the details of that — but I would just encourage you to keep an eye on that. Rob, your thoughts?

Rob West:
Yeah, I totally agree. I'd rather you stay outside of the annuity, especially since you already have the annuity with the pretax money. Perhaps you balance that outside. Yes, you're taking on more risk, but you get the full upside as long as you have the right strategy, the right investment mix, and a long time horizon. I think you'll do better over time, Stephanie, but if that gives you greater peace of mind to transfer the risk to the insurance company, certainly you can do that. And you can have both the pre- and the post-tax options there. Thanks for your call.

Mark, always great to have you with us, my friend. Thanks for stopping by.

Mark Biller:
Always my pleasure, Rob.

Rob West:
Check out more at soundmindinvesting.org. And we'll be right back.