3-D Investment Philosophy: Staying Dynamic, Diversified, and Disciplined in Your Investments

Investing in the right assets at just the right time sounds like a great idea. If you’ve ever tried it, you probably know that it’s exceedingly difficult, if not impossible, to do. There are too many different assets to choose from, and they’re constantly in motion. But there might be a way to tailor your investing approach—one that keeps you open to most opportunities across the broader market while helping you mitigate the natural ups and downs.

This investment philosophy all comes down to three ideas: dynamics, diversification, and discipline—what we call the three Ds of investing.

Investing in the Markets: A Roller Coaster Ride?

Markets move cyclically (never straight up or straight down). Cycles can occur in the short term, with bullish rallies and bearish corrections, and in the longer term, with full-blown bull markets and bear markets. Figure 1 illustrates the typical investor sentiment experience associated with different parts of the market cycle.

Investing in the markets can feel like a roller coaster ride, especially if you pay attention to all of the ups and downs that can happen within the trading day, across several days, or throughout several weeks, months, and years.

But if you’re investing for the long haul, why would you fear short-term fluctuations?

Timing the Market: One of the Biggest Mistakes Investors Can Make

Because investors often fear market volatility—after all, no one finds joy in uncertainty, risk, and potential loss—many investors attempt to “time” the market by pulling out of their investments when the markets fall and getting in when markets rise. But this can be a big mistake.

By trying to time the markets, investors may end up selling when they’re down and buying when they’ve already missed a significant portion of a recovery. As figure 2 shows, trying to time the markets can be costly.

Rather than trying to time markets and dodge volatility, it could be more prudent to hedge your portfolio while casting a wider net for potential market growth opportunities—customizing your investments to match your particular needs and goals.

Introducing the Three Ds of Investing

The three Ds of investing are basic principles designed to help you stay focused on your financial goals, help you maintain a portfolio that can potentially participate in broad market opportunities, and help mitigate your risk exposure in any given area of the market. Most important, the three Ds leverage the power of simplicity to tackle the complexities of the financial markets.

Dynamics: Seeing the Bigger Context Surrounding Your Investments

The word “dynamic” implies motion and change. In an investing context, just about everything is dynamic—from global economic trends and geopolitics to your own personal goals and financial needs.

If things change on a macro scale (such as the economy and markets), what might that mean for your personal investments? And if your needs and goals change over time, how might that affect your big-picture view when seeking investment opportunities across the broader market or economy?

Diversification: Casting a Wider Net to Capture Potential Returns and Minimize Potential Risks

You’ve probably heard it a million times before—diversify, diversify, diversify. Don’t put all your eggs in one basket. So why do some investors concentrate their investments? Well, it could be that they’re trying to put most of their money behind the right assets at just the right time. But as we’ve discussed, timing the markets might not be the best idea.

Is there a sector, industry, or asset class that either outperforms several others or performs consistently enough to predict? Take a look at figure 3, which color-codes asset classes and shows their returns. Do you see any patterns? 

If you don’t see consistent patterns, it’s because there aren’t any. Neither will you find any one asset class that consistently outperforms the others.

When you add the element of diversification to your investments, you’re trying to do two very important things. First, you’re casting a wide net to try and catch potential market opportunities that might perform positively. Second, if some assets in your portfolio underperform, you’re potentially offsetting those assets with others that may perform much better (hence, you’re mitigating your portfolio’s market risk). 

Discipline: Sticking to Your Strategy When the Markets Get Rough

If you have a solid long-term investment strategy, you might not want to allow short-term events, particularly frightening ones, to take you off your path. Many unfortunate investors have failed to heed this wise call. And the 2008 financial crisis taught us once again about the folly of reacting to short-term fears at the expense of long-term plans (see figure 4).

In this example, staying invested through a bear market might have outperformed the choice to exit the markets and reinvest at a later time. It may be next to impossible to predict the onset of a bear market. But the same may be said about predicting a new bull market. 

Putting It All Together for a 3-D Investment Philosophy

If you view your investing activity as a dynamic process, you may be able to develop a long-term plan that flexibly takes into account the changes that may occur on a big-picture and personal scale—considering how changes in one may affect the other.

Applying diversification principles to your portfolio may help you avoid the risk that your entire portfolio could sink due to overconcentrated exposures. Diversifying your portfolio can also potentially help to open it up to a broader range of opportunities in the markets.

And finally, having the discipline to stay the course can be critical to your long-term investment strategy, particularly when market volatility and fear could cause you to second-guess your careful investment decisions.