Worsification by Diversification

Oct 1, 2020 9:47:49 AM / by InvestorKeep

worsification

“You need to diversify your investment portfolio.” You have probably heard it a hundred times. The idea being your investments are mixed enough that they do not all lose value simultaneously (in the case of a downturn). Unfortunately, going to extremes diversifying your portfolio can actually make investment performance worse. This is called “worsification by diversification.” One example of this phenomenon is spreading accounts across multiple financial institutions. While it seems you are diversifying (dispersing finances out), it is actually a detriment. Consolidation of accounts allows for two huge benefits:


1. Price breaks. More money in one institution may lower your overall costs across all your accounts.


2. Your financial professional can give more holistic advice by understanding all your assets and liabilities. This is much easier to do if they are not spread across multiple institutions.


Another example of “worsification by diversification” is believing that a greater number of different investments owned is always better. Diversity is to ensure assets are not correlated, allowing you to mitigate risk. If you own investments you do not understand, and continually seek more diversity in your portfolio, you can quickly build a portfolio of bad investments. Talk with your financial professional about your accounts and underlying investments to ensure you have the appropriate amount of diversity in your investments.

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