How I Define "Diworsification"

Even Peter Lynch (one of the greatest stock investors of all time) managed over 1,000 positions in the Magellan Fund toward the end of his run with Fidelity. So he clearly saw the benefits of diversification, but he also strongly diversified in a way that didn’t outwardly worsen his portfolio or performance. (Do as I say, not as I do.)

Diversification is important because significant concentration carries a lot of risk. One unforeseen event could wipe you out if you’re too concentrated. It could at least severely affect your wealth, income, and overall outcome in life.

Diversification might be the only “free lunch” out there because it offers significant benefits without significant benefits. It has a very favorable risk/reward relationship when used intelligently.

As Peter Lynch obviously saw and experienced firsthand, there are a lot more than just a few extremely high-quality businesses in the world. As such, there’s absolutely no need to concentrate too strongly into just a handful of companies.

Indeed, as I’ve noted before, one of the main benefits of investing in the S&P 500 is the broad diversification it offers. You’re investing across ~500 companies. Not all businesses are created equal. Not all of them are fantastic. But there’s surely more than just ten out of the 500 that are doing very well at any given time. And when some businesses aren’t doing well, others probably will be performing better. That’s just the way the economy generally works. Not everything is humming in sync at all times.


With all that said, I think diworsification is a terrible idea.

Just like there’s no need to strongly concentrate oneself, there’s also no need to diworsify oneself.

My FIRE Fund is spread out across 115 world-class businesses.

Every single company in the Fund is paying me dividends. And the vast majority have lengthy track records of routinely increasing their dividends year in and year out. That’s because these companies are adept at increasing their profit over long periods of time.

I’m broadly diversified across business models, industries, geography, etc.

I’m also set to collect almost $13,500 in dividends over the next 12 months.

If one, two, or even three of these companies were to cut or eliminate their dividends, however, I’d be okay. My lifestyle would carry on as it does. Dividends are, after all, almost always “in the green”.

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If you’re interested in using dividend growth investing to become financially independent and retire early for yourself, check out my two best-selling books on this:  more

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