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Warning: Avoid Premature Diversification

Premature diversification is the root of all evil. 1

On Tuesday, I advised you to stop saying yes. To treat your yes/no decisions as portfolio decisions instead.

But if you’re making portfolio decisions, shouldn’t you diversify?

Yes…when the time is right.

Too often, people diversify too early.

A consultant decides to start offering multiple services. A company creates another product. A student starts learning another skill. All of these are new projects that require time, money and energy.

The problem is that these new projects can detract from existing projects if done too soon.

Diversification has its benefits.

It allows you to spread out your risk, increase your exposure to luck and satisfy the desire to try new things.

But diversification has its costs too. It increases your management overhead, reduces your returns and forces you to spread out your resources and focus.

So when you should diversify?

Diversify once your existing projects are mature: once you can get value out of the project with minimal effort.

For a business, wait until a product or service generates revenue without you having to drive it. For a skill, wait until you hit a level of mastery.

Don’t diversify while you’re still in the investment phase: while you need to put in significant effort or resources to drive your growth.

But what if better opportunity appears?

Evaluate the new opportunity. If it provides a greater benefit than your existing project, replace it rather than adding a new project. If not, ignore it.

This isn’t to say you should stick with a mediocre project.

If you determine your current project doesn’t generate the returns you want, look for a better one. Just make sure it’s truly better, and not just different. Avoid the shiny, new object syndrome.

So if you shouldn’t diversify early on, how to do you mitigate risk?

Focus on agility.

Choose products, services or skills that can be quickly redeployed in new markets.

In finance, agility comes from liquidity—the ability to move your money from one investment to another.

Businesses gain agility by having products and services which can solve problems in multiple markets, or that can be easily reconfigured to solve new problems.

People gain agility by developing skills used by multiple jobs in multiple industries. Things like project management, writing and persuasion.

Agility allows you to pivot—to leverage your existing assets into a new opportunity.

So stop saying yes prematurely, wait to diversify until your existing projects are approaching maturity (or ditch them for the new opportunity) and do things that give you agility.

Have you diversified prematurely? Tell me how.
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1 To paraphrase Donald Knuth.

 

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