October 27, 2022
Diversification is a foundational piece of any well-rounded, balanced portfolio, and advice echoed by experts and investors alike across industries and disciplines. It’s a key component of risk management, and something that every investor needs to implement differently based upon their own situation, preferences, and needs.
It’s hardly a controversial topic of discussion, but it does beg some other questions that often go unanswered when we’re vaguely told to “just diversify” or something along those lines.
One of the most important questions to ask before doing so is this – should you diversify with stocks you don’t even like? What are the diversification downsides? Is it still prudent risk management if you don’t like the company you’re diversifying into? Let’s answer that.
Diversification doesn’t ignore bad businesses
Diversifying doesn’t mean to simply pick a company you believe to be subpar just because it’s in another industry, and therefore subject to a different kinds of risk and different odds of success. No, in fact, doing this would undermine the entire goal of diversification, which is to mitigate risk while providing reasonable upside by getting exposure to different sectors and companies.
If you force yourself to adopt a stock you don’t prefer just for the sake of getting some diversification in your diet, this could be a mistake, and potentially open your portfolio up to even more risk due to holding a company you find to be undesirable based on your criteria.
So, should you diversify into stocks you don’t like? In short, no. Let’s first have a look at some examples: