The 3d’s Of Investing

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.

Key Takeaways

Generational wealth refers to assets passed by one generation of a family to the next.

In some cases assets are transferred after death in the form of an inheritance. In others they are passed to the next generation while the giver is still alive.

Generational wealth contributes to both the wealth gap between rich and poor in the U.S. and the wealth gap among races.

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.

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-6

5.6%

-0.3%

-2.4%

-4.2%

-5.9%

Annual returns and risk of missing the market’s best days.

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?

Define your time horizon and prioritize your goals.

Take a look at your assets and determine what’s available to support your goals.

Get a sense of your risk tolerance and measure it against your time horizon.

Carefully develop a view on the economy and market to help identify attractive and suitable investment opportunities to match your investment time frame.

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

To be diversified, it might help to hold a well-balanced mix of markets and asset classes, including stocks, bonds, commodities, and cash equivalents.

Diversify across and within asset classes.

Remember that concentrating your exposure to a single area in the market—whether it’s a stock, sector, or asset class—can potentially amplify risk in your portfolio.

Don’t forget to apply other wealth management techniques, such as tax-aware investing, when necessary.

Discipline: Sticking to Your Strategy When the Markets Get Rough

Investing often entails a long-term approach.

If you’re investing in a careful and calculated manner for the long haul, try not to let your emotions influence your reaction to short-term events.

It’s important to review and rebalance your portfolio periodically while keeping your long-term time horizon firmly in mind.

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.