Diworsification

AAA

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.

INVESTOPEDIA EXPLAINS '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. Correlation

    In the world of finance, a statistical measure of how two securities ...
  2. Benchmark

    A standard against which the performance of a security, mutual ...
  3. Portfolio

    A grouping of financial assets such as stocks, bonds and cash ...
  4. Risk-Return Tradeoff

    The principle that potential return rises with an increase in ...
  5. Diversification

    A risk management technique that mixes a wide variety of investments ...
  6. Discretionary Investment Management

    A form of investment management in which buy and sell decisions ...
Related Articles
  1. Diversifying not just among different stocks, but among different assets, is how an investor can truly mitigate risk.
    Investing Basics

    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.
  2. Investing Basics

    Diversification: Protecting Portfolios From Mass Destruction

    This investing strategy retains its charm as a protection against random events in the market.
  3. Investing Basics

    5 Tips For Diversifying Your Portfolio

    A diversified portfolio will protect you in a tough market. Get some solid tips here!
  4. Investing Basics

    Introduction To Investment Diversification

    Reducing risk and increasing returns in your portfolio is all about finding the right balance.
  5. Bonds & Fixed Income

    The Importance Of Diversification

    Without this risk-reduction technique, your chance of loss will be unnecessarily high.
  6. Brokers

    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.
  7. Active Trading

    4 Key Factors To Building A Profitable Portfolio

    Buying stocks is a careful balance of risk and reward. Learn to identify your risk tolerance and financial goals with these fundamental tips.
  8. Active Trading

    When Geographic Diversification Fails

    Geographic diversification is becoming an ineffective investing strategy, but there are others that pay off in the long term.
  9. Insurance

    The Dangers Of Over-Diversifying Your Portfolio

    If you diversify too much, you might not lose much, but you won't gain much either.
  10. Mutual Funds & ETFs

    Mutual Funds Are Awesome - Except When They're Not

    This investment is very popular, but that doesn't mean it comes without risk.

You May Also Like

Hot Definitions
  1. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  2. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  3. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  4. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  5. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  6. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
Trading Center