When making the most of portfolio diversification and risk management, it's important to understand the structure of its mathematical model. Portfolio diversification theory creates optimal portfolios by minimizing risk exposure. Your company can begin to accomplish this risk diversification by employing a strategy that spreads investments over different sectors and investment vehicles. However, proper asset allocation is an oversimplification of portfolio diversification. There's also the mathematical formulation of volatility and rick variance that the portfolio diversification incorporates into its model.

To maximize the effectiveness of portfolio diversification theory, you may need to hire a portfolio manager. However, if you or your employees have the time and resources to manage your portfolio in-house, it can save money on fees and charges. This savings will automatically give you a cost savings, but you could incur losses if your portfolio optimization strategy doesn't work well. Therefore, before you decide on a diversification risk management strategy, there are few items to consider, such as:

1. Understand the meaning of the mathematical variables used in portfolio diversification theory.

2. Employ software applications to obtain optimal portfolio diversification.

3. Hire a professional portfolio manager.

Action Steps
The best contacts and resources to help you get it done

Review the models that comprise the modern portfolio theory

There's absolutely no way to properly implement a diversification strategy without understanding the underlying principles that guide the theory. You don't need to be an investment genius, but a good grasp of mathematical and investment information certainly helps when trying to make the most of of portfolio diversification and risk management.

I recommend: Examine the explanations of the modern portfolio theory from Investopedia and Management-Hub.com. These tutorials will provide the basis for your diversified portfolio and you get you on your way to making the most of your portfolio.

Use software applications when making the most of portfolio diversification and risk management

Software alone won't provide the proper portfolio diversification, but it can help you make the most of your portfolio. However, it will help your company organize and stay true to a diversified investment strategy. Software will also manage the mathematical inputs, but it's your job to establish these inputs.

I recommend: Use the portfolio software from Gravity Investments to assist in your diversification and risk management. Compare investment management software solutions by looking over the directory at Capterra.

Contact a professional portfolio risk management service

Asset diversification and risk management is something that can take years to master and some companies just don't have the time and resources to invest in such an endeavor. That's where a professional money manager will come in handy. However, you need to express to them your risk tolerance and your investment goals, if you want to maximize the effectiveness of their services.

I recommend: Speak to representative from J.P. Morgan or Goldman Sachs, which are two of the largest money management firms in the world. With their help, making the most of portfolio diversification and risk management will be much easier.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Remember that in a down stock market, portfolio risk management will simply minimize loses. Too many people believe that diversification will insulate their investment from any loss and this is simply not true.

Having investable assets is a good thing, whether it is for your business or as an individual, but are you ready to risk it all by putting it in the stock market? Is having it all in bonds or money markets the most efficient way to grow your portfolio? Generally, you may know the answers to these questions, but there is a proven economic portfolio diversification theory that helps with these questions.

Risk diversification can help you, the investor, feel more comfortable with your choices and assist in riding out the market ups and downs. Some things you want to know when you are seeking to optimize your portfolio are:

1. The principles behind portfolio risk management.

2. Who can help you and what companies are options when you are ready to diversify.

3. Specific investments to help you reach your goals through portfolio optimization.

Action Steps
The best contacts and resources to help you get it done

Understand the principles behind portfolio diversification and risk management

Economist Harry Markowitz is well-known for his work on the modern portfolio theory and the 'efficient frontier.' Most modern-day asset allocation and portfolio risk management calculators are based on this theory.

I recommend: Moneychimp puts the portfolio diversification theory into plain English with simple graphs. The Social Security Administration describes the modern portfolio theory and discusses life-cycle funds to create optimal portfolios. The Securities and Exchange Commission has a great beginners’ guide.

Choose your means to get to portfolio diversification

Do you need help with portfolio risk diversification, are you interested in learning, and how much are you willing to pay to get help? Answering these questions will determine the type of account you should have.

I recommend: Kiplinger does a good job of describing the advantages of using a discount broker, an online broker or a full-service broker. If you decide you need the help of a professional for portfolio optimization, CNN Money and the Financial Planning Association have articles discussing merits of portfolio manager professionals.

Select investments for optimal portfolio diversification

If you have decided to choose your own investments, there are many resources available to you.

I recommend: If you are new to investing or have a limited dollar amount to invest, Fidelity’s Asset Manager funds, Schwab’s Portfolio funds or American Century's Asset Allocation funds make it easy to get portfolio diversification. If you want to choose your own mutual funds versus having one fund choose your diversification, CNN Money’s asset allocation calculator will ask you some questions to give you a target asset mix then you can view their best mutual funds to buy in those areas. Vanguard will walk you through a questionnaire and provide you with optimal portfolios (including a suggested one based on your answers as well as other allocation mixes) of mutual funds. For free assistance with your current investments, Fidelity has an online program that will analyze your current portfolio and make recommendations to move you toward optimal portfolio diversification. Although you must sign up as a member, you do not have to be a current client. Schwab has a similar portfolio analysis, but you must be a current client to use it.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  There are many ways to achieve portfolio diversification and risk management. Mutual funds are just one way, but having individual stocks, bonds and money market instruments is another way. If you have limited funds, mutual funds tend to be the easiest and most cost effective way to achieve portfolio diversification. Unless you have significant experience in financial markets, you should seek the advice of a financial planner for portfolio optimization with instruments other than mutual funds and cash equivalents.

Portfolio diversification and risk management can help your company increase investment profit while decreasing exposure to turbulent capital markets. The type of portfolio diversification will depend on the type of investment vehicles in which your company chooses to invest. For example, a conservative company may have a portfolio that consists mainly of bonds. Even a portfolio of bonds can achieve proper diversification using the optimal portfolio theory.

The optimal portfolio theory essentially states an investor will attempt to gain the most return on investments with the least amount of risk. If your companies risk tolerance is high, then the risk of these investments will follow suit. The portfolio diversification theory relies on timely and accurate information to make these risk management decisions. Therefore, portfolio diversification and risk management news and trends are essential to the efficiency of this theory. To obtain the news and trends you need, consider the following:

1. Obtain risk diversification news from industry journals and associations.

2. Use portfolio diversification blogs to stay ahead of the information curve.

3. Subscribe to portfolio risk management RSS feeds for the latest industry news and trends.

Action Steps
The best contacts and resources to help you get it done

Utilize associations and journals to locate the latest information on optimal portfolios

Portfolio diversification and risk management news and trends from journals and associations require more effort to obtain than other sources of information. However, they can provide more breadth and scope than other news and trends sources. For instance, you may want to test a new trend for an optimal portfolio, but you don't know anything about the procedure. Journals and association members can provide an unbiased review of the application of the model prior to implementation.

I recommend: Join The Risk Management Association for a collective information resource on news and trends. Subscribe to The Journal of Portfolio Management for detailed portfolio optimization information.

Visit portfolio risk management blogs for industry trends

Blogs represent a great source of news and trends as it relates to modern portfolio theory. However, due to the shear number of these blogs and the editorialized content, they're good for spotting trends and news, but you'll need to verify the creditability of the information. Blogs will often be ahead of the trend line of most any industry, so your company can mitigate the risk of faulty information by using established blogs as a news source.

I recommend: Review the blogs from Experian or The Skilled Investor or ITA Wealth Management. Each of these blogs is relatively well known and the information contained is usually reputable.

Register to receive optimal portfolio diversification RSS feeds

RSS feeds are great tools for locating news and trends because once you register for them, the information comes to your computer desktop automatically. This saves the time and energy of searching the web for diversification risk management information. RSS feed links are usually an orange square available on most websites. Simply click on the square and follow the online instructions to register.

I recommend: Subscribe to the asset allocation RSS feeds at Seeking Alpha and ValuationRisk.net for instant access to information on optimal portfolio diversification news.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Portfolio diversification will limit your company's investment risk, but the portfolio will still maintain exposure to broader market risk. If the market for your investment turns extremely negative, no amount of diversification will preclude losses. Optimal portfolios will just limit those loses based on risk tolerance.

If you're worried about losing money in the stock market, then portfolio diversification and risk management is for you. By using asset allocation or mutual funds, you can ensure that you don't have too much of your money in any one investment vehicle. Using portfolio theory, you may be able to maximize your results while minimizing any risks. However, proper portfolio diversification begins with a thorough knowledge of the terminology associated with risk management industry.

Action Steps
The best contacts and resources to help you get it done

Efficient frontier

The efficient frontier is an idea that there is a way that someone could have an optimal investment portfolio based on all investment possibilities. The idea was created by Harry Markowitz in 1952.

I recommend: Learn more about the efficient frontier and see a picture at the RiskGlossary.com.

Asset allocation

When investing, there are different types of investments to choose from, including stocks, bonds and money market accounts. Asset allocation is the way that you decide to split your money between these different types.

I recommend: The U.S. Securities and Exchange Commission offers a beginner's guide to asset allocation.

Mutual funds

Mutual funds are a relatively easy way to diversify your portfolio for risk management. In a mutual fund, a manager selects stocks from several different companies and pools them together. Investors can then purchase a share of the average of these stocks. Mutual funds typically have a theme, such as technology, which means that all of the companies in that fund are from technology companies.

I recommend: Investorwords.com defines mutual funds.

Modern portfolio theory

The modern portfolio theory is a theory about how to get high returns on your stock investments with little risk, an ideal investing situation. The technique focuses on choosing the right combination of stocks in order to reduce risk.

I recommend: Investopedia offers a detailed explanation of modern portfolio theory.

Asset management

For those that can afford one, it may be a good idea to hire an asset management firm. This financial professional can take care of your investments for you. In theory, the person or company you hire has the training necessary to select good stocks, but investing in the stock market always carries some risk.

I recommend: JP Morgan is one of the most highly respected asset management firms. You can find an asset manager there.

Risk Management Association

The Risk Management Association helps its members to learn about risk principles in the financial segment. It is a not-for-profit company.

I recommend: Learn more about the Risk Management Association from their website.