Diversify or diworsify? How too many investments can hurt you
Is there such a thing as too much diversification in your investment portfolio?
As investors we are often told things like “diversification is your only free lunch” and that studies by people at fancy institutions such as Harvard, Yale and MIT have shown the most important decision you can make as an investor is the asset allocation decision – that is, how to diversify capital within and across asset classes. Most investment professionals would agree that although diversification is no guarantee against loss, it is a prudent strategy to adopt towards your long-range financial objectives. However, thinking about the subject, I wonder if there isn't such a thing as over-diversification or even “diworsification”? Diworsification Initially described in Peter Lynch’s book One Up on Wall Street (1989) as a company-specific problem, this term has become a buzzword for inefficient diversification as it relates to an entire investment portfolio. Owning too may investments can confuse you, increase your investment cost, add layers of required due diligence and lead to be...
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