Is diversification overrated?
Investors must take care not to let the diversification tail wag the investment dog
Nobel laureate Harry Markowitz once said: “Diversification is the only free lunch when it comes to investing.” It’s difficult to argue with a Nobel prize winner. Still, what might be missing in much personal finance and investing discourse is a conversation about quality diversification rather than diversification for diversification’s sake or, using the term coined by legendary investor Peter Lynch, “diworsification” to describe being overdiversified or badly diversified within a portfolio.
For example, an investor could have a 20-stock portfolio pitched against a standard MSCI World ETF covering 23 developed-world international markets and comprising 1,300-plus stocks. There is no contest in terms of diversification. However, not many investors stand back and question the expected risk-reward opportunity between these two options. The 20-stock portfolio might be the better investment from a risk-reward point of view. In other words, it achieves the required rate of return d...
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.
Subscribe now to unlock this article.
Support BusinessLIVE’s award-winning journalism for R129 per month (digital access only).
There’s never been a more important time to support independent journalism in SA. Our subscription packages now offer an ad-free experience for readers.
Cancel anytime.
Questions? Email helpdesk@businesslive.co.za or call 0860 52 52 00. Got a subscription voucher? Redeem it now.