How I Define "Diworsification"

If you would have told me I had to own only shares in Coca-Cola, I wouldn’t have been uncomfortable with that idea. But I don’t have to. And there’s no reason to invest that way.

Likewise, I remember acquiring shares in PepsiCo, Inc. (PEP) shortly thereafter.

I felt extremely happy about this purchase, too. It was a beverage giant in its own right. But I was more excited about the snacks business, which they’ve been dominating for a very long time now. When people are munching on Doritos, I’m cashing dividend checks. A nice calorie-free snack for me!

If you would have told me I had to only own stock in PepsiCo, I could do that. Again, though, I don’t have to. And there’s no reason to be that concentrated.

This line of thought scales way up. That’s because there are hundreds of high-quality dividend growth stocks out there. To force oneself to ride it out with a few is, in my opinion, nonsensical. It’s taking on unnecessary risk for no apparent reward.

CONCLUSION

It’s up to each individual to find the appropriate amount of diversification across their investments. That’s a personal choice.

Of course, diworsification should always be avoided.

If I wouldn’t be happy theoretically owning the entirety of a particular business, then buying a single share of that business would be diworsification to me. 

I’ve found that the question proposed earlier has helped me avoid diworsification, while simultaneously building a broadly diversified collection of some of the best businesses in the world.

“Would I be comfortable owning this entire business?”

And I believe that asking myself this question before any investment will continue to aid me in the future as I go about acquiring shares in businesses I don’t yet own a slice of.

Full disclosure: I’m long all aforementioned stocks.

What do you think? Is this a good question to ask oneself to avoid diworsification? 

Thanks for reading.

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