What Does Modeling an Investment Portfolio Entail?

29 September 2020
 Categories: , Blog

You want to hire an investment portfolio building service provider. However, you're not quite sure what financial modeling for your business entails. What are you doing when you use financial model portfolio building to plan your investments? Here are four things that it entails.


Every financial model portfolio building service is grounded in data. This can include data that goes from the micro scale, such as individual finances, to the macro scale, such as global economic conditions. Folks in the investment portfolio building support services world want to have as much data as possible so they can then use computing resources to project high, low, and middle scenarios for how your money will perform.

Statistical Methods

At the core of modeling financial and investment issues, you'll find a lot of statistical methods in use. These include tools that allow modelers to make projections, calculate risks, and even control for potential errors. Many modelers also stress test their results by exploring what would happen if, for example, conditions in the international banking system cratered as they did during the 2007-09 financial crisis.

Most of these jobs are handled using established financial and investment models. For example, the basic concepts of compound interest are modeled using a thing known as Euler's number. The number is essentially a quirk of the universe, and it appears in numerous fields of study where changes scale quickly or repeatedly.

Individual Profiles

No model is immune to the influences of the individual, and investment model portfolio service firms must account for this fact. If you're someone with a high appetite for risk and decades to invest, for example, your portfolio will likely be modeled toward things that favor growth, such as shares of start-up companies in emerging industries. Conversely, someone who just needs to live off the interest because they already have significant wealth might focus on a model that favors low-risk and consistent investments like municipal bonds and property.


The objective when projecting how a portfolio might perform under ideal, adverse, or normal conditions is to ensure you'll reach your goals. If you want to have money for retirement, for example, it's important to model what would happen if an economic downturn hit right before your target date.

A model under such circumstances might favor taking high-risk investments off the table as you approach your retirement date. Your risk profile will realign as you get closer to reaching your goals, and your portfolio will favor maintenance over risk and growth. For more information about how a financial model portfolio building service could benefit your business, reach out to a financial planner.