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Financial Literacy 101: Inside-out investing

Seventh in a series for
Financial Literacy Month

April is National Financial Literacy Month. So this month we're featuring a series of posts on basic principles/strategies related to investing and personal finance.

Here's post seven — about a counterintuitive approach to becoming a successful long-term investor.

This may sound strange at first, but it's best to make your investing decisions with little regard for what's going on in the investment markets. No kidding.

Think about this: Where do investment decisions originate for many investors? The starting point is found in the impersonal "outside" world of current events, magazine articles, and brokers' 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 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 as you would other consumer purchasing decisions.

For example, if your family has grown to the point you need a minivan to haul everyone around, you wouldn't buy a sporty new Camaro SS instead 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 many people have a difficult time applying this consumer mindset to their investing decisions, even though they should.

Here are a few of the questions an inside-out investor should be asking:

• Is my financial foundation rock solid — that is, am I debt-free and is my contingency fund sufficient?
• Am I overly invested in one sector of the economy or in a single stock, or are my investments well diversified?
• Am I meeting my giving goals?

Notice that the focus is on personal needs and circumstances, not on the headlines of the day (which almost never tell you anything that will enhance the quality of your decision-making).

Current events — whether good or bad — may prompt you to run through your personal list of review questions, but if you want to be a successful long-term investor, the news of the day should not dictate your answers.

To learn more keys to long-term investing success, read The Sound Mind Investing Handbook (5th ed.) by Austin Pryor. Copyright © 2008 by Austin Pryor.

SMI's Financial Literacy 101 series

• Creating your own personal financial plan
• Save by paying yourself first
• Where to put your savings
• How much should you save for emergencies?
• The upside of index funds
• A simple and steady investing strategy
• Inside-out investing
• Making the 'right' investing decisions
• Your most important investing decision

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