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.

  1. Portfolio

    A grouping of financial assets such as stocks, bonds and cash ...
  2. Diversification

    A risk management technique that mixes a wide variety of investments ...
  3. Correlation

    In the world of finance, a statistical measure of how two securities ...
  4. Risk-Return Tradeoff

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

    A standard against which the performance of a security, mutual ...
  6. Equity Risk Premium

    The excess return that investing in the stock market provides ...
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  3. Do mutual funds pay interest?

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  4. Why have mutual funds become so popular?

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