Comments on: Diworsification

By: Friday Linkstuff - lots and lots and lots o’ links!

Friday Linkstuff - lots and lots and lots o’ links! — Fri, 08 Aug 2008 09:05:11 +0000

[...] Does All My Money Go had a post on diworsification – don’t know what that means? Then read the [...]

By: Jordan Clark

Jordan Clark — Fri, 01 Aug 2008 09:54:06 +0000

The classic Canadian example of diworsification is Nortel in the dot come bubble. A lot of investors (myself included) unknowingly diworsified instead of diversified even when owning a broad group of mutual funds, only to find out that because of loose investment mandates (and mutual fund mangers trying to chase performance) they all owned a chunk of Nortel.

By: Derrick Fung

Derrick Fung — Wed, 23 Jul 2008 17:32:53 +0000

Great article. I think many people don’t understand the true meaning behind diversification. If one holds a portfolio of pure energy companies, or example, some might consider that they are ‘diversifying’ by investing in different energy companies. When in reality, these companies might be positively correlated. I think a good measurement of how strong one’s portfolio is diversified is by using measurements of correlation. True diversification to me means negative correlation (diff industries, diff size, diff countries)

By: Susan

Susan — Tue, 22 Jul 2008 15:27:23 +0000

Good reminder, specially now when there’s some good companies at very reasonable valuations. Too easy to jump on the proverbial horse and ride off in all directions. Thanks, Preet.

By: Preet

Preet — Tue, 22 Jul 2008 13:38:05 +0000

@FT – you are quite right – Lynch did talk about companies expanding beyond their core competencies and called this diworsification. I think that since then the concept of diworsification has become accepted as the process of adding to one’s portfolio to the detriment of the risk/return trade-off (which can apply to a company’s portfolio of assets/business lines or an individual investor’s investment portfolio). I’ll add a note to the post – thanks for the great comment!

By: MillionDollarJourney

MillionDollarJourney — Tue, 22 Jul 2008 09:08:13 +0000

Preet, I always thought that Peter Lynch’s “diworsification” meant that when a company expands beyond their area of specialty. For example, if Exxon Mobile decided to expand into the banking sector. However, I can also see how it would apply to the individual investor.