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What is Diworsification?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 21 August 2016
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Diworsification is an investment strategy that is sometimes described as being diversification run amok. Rather than holding a significant number of shares of a given stock, the investor will choose to acquire a few shares of stock in a wide range of companies that are within the same classification. While greatly reducing the degree of risk to the investor, diworsification also tends to guarantee a lower return on the investment.

It is important to note that many brokers and financial analysts will encourage investors to diversify the financial portfolio. However, this approach usually takes the form of encouraging the inclusion of different classes or categories of investments. With this type of diverse activity, the idea is to balance out the assets in a manner that maximizes the changes for earning a healthy return, while still minimizing the degree of risk to the overall value of the portfolio.

With diworsification, this same basic principle is applied within a class of stocks. Thus, instead of owning ten thousand shares of one company, the investor may choose to own a hundred shares in a hundred different companies. To be sure, this does reduce the amount of risk associated with the investment activity. Should an investment in ten thousand shares in one company begin to nosedive, the impact would be quite significant. By the same token, if the value of a hundred share investment begins to sour, the negative impact on the overall value of the portfolio is minimized.

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Financial experts disagree on whether or not diworsification is in the best interests of the investor. Purchasing smaller lots of stocks does effectively preclude the investor from being able to participate in stock deals where larger lots must be purchased. From this perspective, the investor is not likely to ever see a dramatic return on any one investment. At the same time, the use of diworsification can be an ideal fit for a conservative investor who is very happy with small but incremental growth.

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