Twenty years ago, we evaluated brokerage firms’ recommendation that investors should diversify a concentrated stock position by buying additional stocks on margin[McCann and Luo, 2003]
Twenty years later, some brokers and advisors continue to recklessly recommend that their clients borrow against concentrated stock positions and purchase additional stocks to diversify. In this note, we use recent stock market returns to update our previous work which used data from the 1990s. We also extend the analysis to cover a larger universe of stocks and employ more sophisticated simulations. Our updates and enhancements show that this “hold, borrow, and buy some more” strategy remains inconsistent with basic principles of prudent investment management; leveraged diversification perversely increases risk and or lowers expected returns.