Di-worse-fication.
Brian Portnoy, once said, "Diversification means always having to say you're sorry."
But have you heard about "Diworsification?"
Many investors are experts in their field: IT, banking, engineering, pharmaceuticals, aviation, et cetera.
This expertise tends to be reflected in their respective portfolios.
💾 Tech workers invest disproportionately in tech.
💊 Pharmaceutical workers invest disproportionately in pharma.
🏦 Banking executives invest heavily in financial institutions.
There are two reasons for this:
1️⃣ Companies pay their workers in company shares.
Employers often choose this because they want employees to be loyal. There is a belief that employees will work harder to keep the share price high. And it gives the employee a sense of ownership in their work.
The downside is that the vast majority of publicly traded companies will underperform the market. Therefore, a large concentration in this stock will create a drag on the portfolio of the employee.
Another downside is the high concentration in a single company, industry, and economy.
Imagine an economic recession, your company cuts your job, and the company stock price falls. All this happening all at once.
😱Both your Human and Financial capital would both take a real hit.
2️⃣ Experts believe their industry knowledge gives them an edge in picking winners.
This is the effect of AVAILABILITY BIAS.
As industry experts, you may hear of all the movements happening in your sector: People being hired and fired. New startups, rumors of cuts or cutting-edge technology, etc.
This makes many investors to concentrate heavily in their industry. Availability bias results from always hearing about this information in your daily life and gives investors a sense of control in their investments.
This is an illusion. How a sector performs relative to the broader economy is beyond our control and almost all information is efficiently priced into the shares before you could buy or sell.
The downside is your net worth is heavily dependant on your economic sector and as we have seen in tech recently, job cuts and losses in share prices have means a Tech worker would have a hit to their human and financial capital.
Diversification is less about having a higher return on investment and more about risk management.
This is where "Di-WORSE-ification" comes into play.
If you're holding really hot stocks you may be less inclined to diversify it because you don't want to lose out on all that expected growth. But it is a cognitive trap.
I'm Carlo, and the real value of financial advisor isn't picking the best portfolio. It is about balancing risk with reward. Whenever we work together, you can expect a total analysis of your assets, businesses, and family situation to ensure you don't have any blind spots.
