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Make Sure Your Investment Decision-Making Is Inside-Out

By Austin Pryor
Sound Mind Investing One of the more contra-intuitive propositions that I regularly put forth in my newsletter 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 me 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, I'm 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 Volkswagen Beetle instead merely because an article in Money magazine said they're exceptionally "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 "The market seems shaky and I've read where many experts are sounding an alarm. Should I sell my stocks?" 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 my opinion 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 and is my emergency fund 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? Changes here might dictate a change in my portfolio mix between stocks and bonds.
  • Are my protective boundaries still in place? 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 (see Will Company Stock Help Or Hinder Your Retirement Dreams? ).
  • 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.

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.

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