One answer is Mean-Variance Optimization, a mathematical technique pioneered by Harry Markowitz in the 1950's. Since its introduction, Mean-Variance Optimization, or MVO, has been one of the most successful applications of mathematics in finance. While the technique has been widely used in major investment institutions, the power of MVO has only recently been of interest to individual investors and financial services professionals due in large part to the growth in market access afforded by the internet.
Diversification is the key concept.
This is the process of selecting assets that complement one another in order to mitigate risk. The interaction between two assets is characterized by the correlation between their respective returns. Under these assumptions, a mathematically optimal answer to the asset allocation problem can be generated. Wagner's WAoptimize product for personal portfolio optimization and our M-V Optimizer product for larger scale portfolio optimization problems bring the power of MVO to your home or business. If you need to embed extensive portfolio optimization capability into your own software application or website, then you should consider our industrial strength MVO Library product.