Monday, 9 November 2015

Diworsification and the Twitter Effect

It seems that Twitter uptake may have reached saturation point. Apparently the user count has stayed flat since the start of the year. Not good news for a social media service which bases popularity on pure numbers (as in number of followers, the "I follow you, you follow me" syndrome).

I do use Twitter but, I admit, not in the most "Twitter-ish" way. In other words I don't put any effort into boosting my followers and I "mix-up" my interests in the same account (some of my political re-tweets must drive my FI followers mad - if they ever read them, more of this below). In other words, I follow who I'm interested in and I tweet what I'm interested in. I only access my timeline about once a day - more often if there is a breaking news story that I'm curious about as I find it particularly useful for up to the minute information and opinion, and I don't tweet on anything like a regular basis.

Another interesting article about Twitter this week mentions a further effect that comes into play when it is used in the conventional way - i.e. the way aimed at gaining you the most followers by following lots of people yourself  - and that is a situation arises such that:

"genuinely tending to the tweets of more than 200 people becomes impractical (and unenjoyable) ..... with everyone sending out tweets few people have the time or energy to read or act upon." (Andrew Smith)

Over-enthusiastic "following" which is part of the essence of proactive Twitter usage, means you are less likely to actually see the quality tweets that you are really interested in, because your time-line will be full of stuff you're not really interested in .

 In many ways this emphasis on quantity rather than quality reminds me of the investing sin of diworsification - i.e. holding so many funds/stocks that any inherent quality/value in the portfolio is lost or watered down by the fact that it makes up such a small part of the whole.

The subject of this week's Portfolio Clinic in Investor's Chronicle is a case in point. The investor holds 46 funds, and as the commentators point out, he may as well be holding a global index fund at far less cost and trouble. But also, as with the Twitter "too much noise" effect any quality brought to his portfolio by actively choosing funds is drowned out by, and buried in, the quantity of assets he owns.

"46 is far too many. Apart from being a large number to manage, research and review, there is the potential for overdiversification or 'diworsification' - where a portfolio is spread so thinly that any outperformance is too small to be noticeable." (Danny Cox).

The obvious answer for us ordinary investors to the issue of diversification in equities is, of course, to hold a global tracker and not to look at it too often. This incidentally is also perfect advice for the ordinary Twitter user (celebrities excluded) who is determined to get their follower count as high as possible. Follow everyone, (if you're really dedicated to the task you can even use software to do the job for you) and don't even try to asses the quality of what they say. Trying to mix quality with quantity in either stocks or Twitter is a self-defeating exercise.


  1. Hi Cerridwen

    I only really use my account to let people know I've just posted on my blog - other than that, the odd comment etc.

    I always used to wonder why some people would repetitively tweet the same tweets and it is because their tweets get lost in the 'noise'. Annoying for me though as I'm obviously noticing that they are sending the same tweets out!
    I try to keep my following to under 100 and periodically do a Following 'cull'. Unless it's a newspaper or sports updates, I don't really like following people who post loads of tweets every day - too much noise of very little quality and I might miss the one tweet from someone who only posts once a month!

    In order to make the most of Twitter, I find that I have to make the time to scroll through what's been posted and it is time consuming. I think another cull is in order!

    1. Hi weenie, yes I think I need to do a bit of a cull too.

      Sometimes it's necessary to have a bit of a trial period when following an account to see if they continue to be interesting and useful, or if they start to become annoying by tweeting every 5 mins :-)

  2. Diversification: we have three chunks of wealth. (i) Our pensions - final salary and State, (ii) our savings and investments, and (iii) our house. The value of (i) depends on the pension schemes, and on HMG, not reneging on their promises, so it's largely a bet on Britain continuing to be recognisably Britain, and pootling along in reasonable good order and prosperity, under the rule of law. The value of (iii) depends on the same things, with the added effects of depending on prosperity in our local industries, and on the hope that nobody reforms (as really they ought) the absurdly good tax breaks for being an owner-occupier.

    That means that (ii) should be used to diversify away from dependence on our locality and our country. In other words we should avoid UK equities and gilts, and perhaps we should avoid investing in overseas shares if they are in the same industries that our local prosperity depends on. When I put this proposition on RIT's blog he wondered whether I was being sarcastic. I'm not. I see no flaw in the logic. Do you?

    1. I would have thought that at least some of the pension component of our wealth is quite likely to be globally invested (although as you say UK taxation and State pension rules do play a big part). My SIPP isn't invested solely in UK equities and I would have thought there was at least something of a global mix in the LGPS scheme too. But I take your point, simply by living where we do the value of our pensions and property is tightly tied to UK boom or bust.

      In addition, markets in the developed world do often seem to trend in the same direction (? is this correct?) so I suppose logically we should be over-weight in emerging markets equities if we are to diversify seriously.

      Your point about which industries provide the most potential for diversification for the UK investor is a very interesting one. Thanks.
      (Incidentally non-UK renewable energy companies might be a good place to start seeing as the current UK Government seems dead set against investing in them and the world is going to have to wake up about their value/necessity soon - although I know you won't agree :-) Apparently Amber Rudd comes before the climate change committee tomorrow and will be forced to admit she misled parliament about Britain hitting green targets.

  3. I dont't twitter

    Could you explain the point of being on twitter to me?

    I can see that twitter is a promotional tool, but if everyone on twitter is promoting something, why would they bother to look at what you are promoting?

    1. Promotion does play a part, that's for sure, but it's also useful as a news alert service, picking up links to articles you might have missed, blog posts, etc.

    2. I just have a series of bookmarks to do this. How is twitter better for looking at articles and blog posts?

    3. It's just down to personal preference. I use bookmarks too but sometimes my twitterfeed throws out a link to something I would have otherwise missed - serendipity :-)

  4. The way around the twitter problem is to use tweetdeck. You build lists of your favourite people to follow, and the tweets from each list appear in a separate column.

    For example, I have separate columns for personal finance, trading and FIRE.

    The equity diworsification argument is also a bit bogus. If you buy a global tracker you get 52% in the US and very little in emerging markets. That might be ok for some people, but it's not the allocation I want.

    I have a lot more than the 46 investments the guy in the IC had.

    1. Thanks Mike, if I ever decide to put a bit more organisation into my my currently rather chaotic twitter feed I'll take a look at tweetdeck.

      The IC portfolio holder was actually holding 46 funds, not individual equities. I can understand why you personally might not want to hold a global tracker for the reason you give, but I don't see that those reasons invalidate the points made by the commentators about the effects on a portfolio of owning a high number of active funds.

    2. I's not that the comments are invalid, they just make an assumption about an investor's objectives.

      I don't want to track the world index, and my many funds (I have lots of funds as well as lots of stocks) allow me to track the things I like. Not every set of funds behaves like the index.

      Try this set of 50 as an example: investment trust portfolio

      Definitely try Tweetdeck - it makes sense out of a busy Tweetstream.

  5. can i second the tweetdeck idea - i use it extensively and it's a godsend to say the least.

  6. I think twitter is a waste of time to be perfectly honest and it sounds like I go on there even less than you do. I would say twice per week or less.

    There was a time quite a few years back, when I was on there every day and it became an obsession, so I just went cold turkey and haven't ever really got the bug back!

    I agree, when you see accounts following thousands of people, I just think, well what is the point of that. I bet well over half the people following them aren't even looking at their tweets, and vice versa.

    Nice link into the diversification aspect of investing as well, I like what you did there :)

  7. Thanks TFS. I agree that spending too much time on twitter isn't at all productive.

    The times I do find it really useful though is when news is breaking (as with the terrible events at the weekend). The updates (from a wide variety of sources in my case) are not always reliable but tend to come much faster than via the traditional press. That's why I do like to diversify the types of account I follow and mix it up a bit.