Where do investment decisions originate for many investors? The starting point is in the impersonal “outside” world of current events, magazine articles, and “expert” recommendations. Their decisions are guided primarily by outside considerations. As they respond to 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 outside information to stimulate their thinking and provoke them to action. Decision-making would be impossible without it.
For other investors, the starting point of 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 based on what’s required to ensure their financial holdings are in accord with the game plan.
This is “inside-out” thinking, where decisions are primarily shaped by inside considerations. Thus, current market fads, trends, and “expert” opinions are largely irrelevant to inside-out investors. The “outside” world of investment professionals comes into the picture only when assistance is needed in executing decisions already made.
We’re encouraging you to be an inside-out thinker. In other words, make your investing decisions like other consumer purchasing decisions. For example, if your family has grown to the point that you need a minivan to haul everyone around, you wouldn’t buy a sporty little convertible because a magazine article 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.
“This is obvious!” you say. Yet, people have difficulty applying this consumer mindset to their investing decisions. Many investors have been whipped around by the market’s volatility this year, selling in fear when the market plunged in June, only to buy again after it rallied in July/August. Much better to be guided by a well-defined strategy, such as those provided by SMI, than to be whipped around by outside-in factors such as what the “experts” are predicting will happen next.
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 the 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 to decide whether to make portfolio changes.
Notice that the questions above are about personal needs and circumstances rather than about how to react to the latest headlines (the news rarely tells you anything that will enhance the quality of your decision-making). Although current events may prompt you to run through your own list of review questions, they should not dictate the answers.
You can also listen to the related podcast on this topic.