How I Define "Diworsification"

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Diversification.

The only “free lunch” for investors, according to some.

A tool for the uninformed, according to others.

I’m not here to argue it either way – I’m personally in the camp of the former – because I’ve already made my mind up and invest accordingly.

What other people decide to do is up to them.

Everyone has their own risk tolerance and views on diversification.

People should always invest as they see fit.

So I’m not writing this article in order to in any way convince anyone of any level of diversification, nor will I be delving into the historical numbers that prove out why diversification is so important and worthwhile. I’ve already put together content like that over the years, so I don’t want to retread old ground.

I’m instead putting this piece together to have a conversation on some of the rationale behind the broad diversification of my own portfolio.

Specifically, I want to speak on a concept that detractors of diversification sometimes point to.

DIWORSIFICATION

That concept is “diworsification”.

A term popularized by the great Peter Lynch, it’s a play on the word diversification that refers to diversifying to the point of worsening your portfolio.

An example would be to go after low-quality/high-risk investments simply to diversify.

One shouldn’t ever diversify purely for the sake of diversification.

Obtaining a new investment that reduces the risk/return ratio of your portfolio is diworsification.

Sometimes this is only seen in hindsight, but it should always be avoided when it’s clearly present.

I actually read about some so-called dividend growth investors jumping on the Bitcoin craze a while back. That would be, in my view, a prime example of diworsification. Throw in a great deal of speculation on top of it.

DIVERSIFICATION

Diversification should be used to spread and reduce risk. That’s it. It’s risk management. Used appropriately, it can allow you to get maximum return at minimal risk.

Of course, what’s “appropriate” will vary according to one’s own risk tolerance.

There are few successful investors who have either argued against diversification or have invested in a heavily concentrated manner over a very long period of time.

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