Diworsification

DEFINITION of 'Diworsification'

The process of adding investments to one's portfolio in such a way that the risk/return trade-off is worsened. Diworsification is investing in too many assets with similar correlations that will result in an averaging effect. It occurs where risk is at its lowest level and additional assets reduce potential portfolio returns, as well as the chances of outperforming a benchmark.


The term was coined by legendary investor Peter Lynch in his book, "One Up Wall Street," where he suggested that a business that diversifies too widely, risks destroying their original business, because management time, energy and resources are diverted from the original investment.

BREAKING DOWN 'Diworsification'

Investors often achieve this by investing in a number of different mutual funds that have similar investment strategies within the same grouping of shares.

Diworsification is a play on the word diversification. The diversification strategy usually involves an accumulation of assets with negative correlations, which reduces risk and can increase potential returns, by minimizing the negative effect of any one asset on portfolio performance.

RELATED TERMS
  1. Risk-Return Tradeoff

    The principle that potential return rises with an increase in ...
  2. Portfolio Investment

    A holding of an asset in a portfolio. A portfolio investment ...
  3. Portfolio Management

    Portfolio Management is the art and science of making decisions ...
  4. Diversification

    A risk management technique that mixes a wide variety of investments ...
  5. Managed Futures

    An alternative investment strategy in which professional portfolio ...
  6. Peter Lynch

    One of the most successful and well known investors of all time. ...
Related Articles
  1. Trading

    Top 4 Signs Of Over-Diversification

    Learn how to spot over-diversification in your portfolio and find out why some financial advisors are motivated to do it.
  2. Managing Wealth

    Concentrated Vs. Diversified Portfolios: Comparing the Pros and Cons

    Examine the relative advantages and disadvantages of utilizing either a concentrated or a diversified investment portfolio strategy.
  3. Managing Wealth

    Diversification Beyond Stocks

    If you think holding several stocks means you're diversified, think again - there's much more to be done to reduce portfolio risk.
  4. Investing

    Portfolio Diversification, Done Right

    Diversifying your portfolio by means of different securities and asset classes is an essential approach to lower the overall risk of a portfolio.
  5. Managing Wealth

    Risk and Diversification: The Risk-Reward Tradeoff

    The risk-return tradeoff could easily be called the iron stomach test. Deciding what amount of risk you can take on is one of the most important investment decision you will make. The risk-return ...
  6. Managing Wealth

    Introduction To Investment Diversification

    Reducing risk and increasing returns in your portfolio is all about finding the right balance.
  7. Personal Finance

    The Dangers Of Over-Diversifying Your Portfolio

    If you diversify too much, you might not lose much, but you won't gain much either.
  8. Managing Wealth

    Achieving Optimal Asset Allocation

    Minimizing risk while maximizing return is any investor's prime goal. The right mix of securities is the key to achieving your optimal asset allocation.
  9. Managing Wealth

    The Pitfalls Of Diversification

    Diversifying may reduce risk, but what does that mean to your overall ROI? Find out here.
  10. Managing Wealth

    In Praise Of Portfolio Simplicity

    Find out how you can streamline your investments for greater returns.
RELATED FAQS
  1. How are negative correlations used in risk management?

    Learn about risk management and how negative correlations between assets are used to diversify and hedge risk associated ... Read Answer >>
  2. How can I use risk return tradeoff to determine my risk tolerance and investment ...

    Learn how an investor can use the risk-return tradeoff to determine what assets to include in a portfolio, and understand ... Read Answer >>
  3. Why is risk return tradeoff important in designing a portfolio?

    Learn how the risk return tradeoff is used in the construction of portfolios, and how modern portfolio theory seeks to diversify ... Read Answer >>
  4. How do fund managers use correlation to create portfolio diversity?

    Read about how contemporary investment fund managers use the concept of correlation to add diversification among assets in ... Read Answer >>
  5. What level of correlation among investments will guarantee market returns but have ...

    Learn how modern portfolio theory uses correlation to determine the efficient frontier for which assets to include in a portfolio ... Read Answer >>
  6. How is portfolio variance reduced in Modern Portfolio Theory?

    Learn about modern portfolio theory, specifically what it asserts about asset allocation and managing portfolio risk through ... Read Answer >>
Hot Definitions
  1. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  2. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  3. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  4. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  5. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  6. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
Trading Center