"Diworsification” (diversification + worse) is diversification for the worse. Diversification is often sought so that one doesn’t have the high risk of “all the eggs in one basket.” However, too much diversification (or diversification without a clear strategy) also contains risk.
Peter Lynch of Fidelity Investments coined “diworsification” in 1989 saying, “A lot of companies have gotten into other businesses that were away from their basic businesses, something I call ‘diworsification.’” The term “diworsification” has expanded beyond business diversification and also refers to the diversification or “diworsification” of personal financial portfolios.
What Does Diworsification Mean?
The process of adding to one’s portfolio in such a way that the risk/return tradeoff is worsened.
The Free Dictionary
Diversification of a portfolio without regard, or with incorrect regard, for the necessary mathematical formulation such that it makes the portfolio riskier without any chance of a higher return.. Diworsification especially refers to investing in several mutual funds with the same or similar investment strategies. This exposes the investor to the unsystemic risks associated with the individual funds without hedging the systemic risk associated with all of them. See also: Naive diversification, Markowitz portfolio theory.
What is Diworsification?
Diworsification is an investment strategy that is sometimes described as being diversification run amok. Rather than holding a significant number of shares of a given stock, the investor will choose to acquire a few shares of stock in a wide range of companies that are within the same classification. While greatly reducing the degree of risk to the investor, diworsification also tends to guarantee a lower return on the investment.
Wikipedia: Peter Lynch
Peter Lynch (born January 19, 1944) is a Wall Street stock investor. He is currently a research consultant at Fidelity Investments. Lynch graduated from Boston College in 1965 and earned a Master of Business Administration from the Wharton School of the University of Pennsylvania in 1968.
U.S. News & World Report
Volume 106, Issues 9-16
A lot of companies have gotten into other businesses that were away from their basic businesses, something I call “diworsification.”
11 March 1989, Los Angeles (CA) Times, “Picking Stocks? Study Firms, Not the Market” by Bill Sing, Business, sec. 4, pg. 3:
That’s the advice of Peter Lynch, one of the best stock pickers of all time as portfolio manager of the Fidelity Magellan Fund.
Be wary of companies with fancy, esoteric names, or those spending corporate assets on diversification—what Lynch calls “diworsification.”
Financial Statement Analysis and Business Valuation for the Practical Lawyer
By Robert B. Dickie
Chicago, IL: American Bar Association
One can understand why Peter Lynch, the legendary former manager of Fidelity’s Magellan Fund, termed diversification by companies as “diworsification.”
22 August 1999, Morristown (NJ) Daily Record, “Young Investors” by Warren Boroson, pg. 1:
Peter Lynch, the famous Fidelity investor, once dismissed such investments with a word that he had made up: diworsification.
The Motley Fool
Red Tape for Schwab
By LouAnn Lofton (TMF Bling)
April 3, 2003
This isn’t a case of a Peter Lynch-type “diworsification,” with Schwab adding services and getting into a business it knows nothing about.
‘Diworsification’: the perils of diversifying across asset classes
By MoneyWeek Editor-in-chief Merryn Somerset Webb
Oct 12, 2006
Diversification or ‘diworsification’?
Owning lots of things that are all going up in value is fine. Owning lots that are of questionable long-term quality isn’t.
Fidelity fund star Peter Lynch calls holding too many different shares that you don’t understand “diworsification”. Holding too many asset classes may turn out to be just another version of the same thing.
First published in the Sunday Times 8/10/06
New York City • Banking/Finance/Insurance • (1) Comments • Tuesday, February 15, 2011 • Permalink
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