One of the most abused words in finance is diversification. Everyone’s heard it. Everyone nods like it’s gospel. But there’s a fine line between smart diversification and what Peter Lynch famously called diworsification.
I’ve seen portfolios that look like a grocery cart packed by someone on a sugar high: a little Tesla, a dash of gold, some biotech SPACs, a half-dozen meme coins, a sprinkle of real estate ETFs. In theory, it’s “diverse.” In practice, it’s chaos.
True diversification isn’t about owning a lot of stuff. It’s about spreading exposure across uncorrelated risks. Own a basket of tech stocks? You’re not diversified. You’re just overexposed to one narrative. Load up on both Ethereum and Solana? That’s not diversification either — it’s just making two bets in the same casino.
What does smart diversification look like?
- Hedged exposure: Tech balanced with staples, growth balanced with value.
- Cross-asset balance: A blend of equities, bonds, commodities, and yes, even a slice of crypto if you understand its risk profile.
- Geographic spread: Emerging markets don’t move in lockstep with the S&P 500.
Here’s the kicker: sometimes adding more assets reduces returns without meaningfully reducing risk. That’s diworsification — when complexity masquerades as safety.
I once reviewed a hedge fund deck where the manager bragged about holding “over 400 positions.” Impressive? Not really. At that point, you’ve basically built an overpriced index fund with worse liquidity.
So next time you’re tempted to add “just one more” to your portfolio, ask: does this actually balance my risk, or just make me feel busy? Diversification should sharpen the compass, not clutter the map.
🔗 Investopedia: Diworsification
🔗 Morningstar: The Myth of More Diversification
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