How Do You Financially Model an Investment Portfolio?

24 September 2020
 Categories: , Blog

Financial model portfolio building can sound like something that's out of reach for the average person. Advances in finances, data science, and computing power, however, have made investment portfolio buildings services something that everyone can access.

You might wonder, though, what opportunities and concerns this will mean for you. Let's look at how to financially model portfolios and their implications for investors.

What Does It Mean to Financially Model a Portfolio?

There are massive amounts of data available about both large-scale problems, such as the economy and global affairs, and small-scale problems, such as personal finances and investment goals. Using this data, a financial model portfolio building service provider can help you project how different scenarios might play out.

Suppose you want to look at the best and worst scenarios for where your investments would be after a giant run-up in inflation. An investment portfolio building support services professional can examine how macro trends might collide with your circumstances. They can then show you a band of projected outcomes for how your portfolio would likely perform if there's a short, massive spike in inflation versus a prolonged period of stagflation.

Returns and Risks

A big part of this sort of modeling tries to boil your investment concerns down to returns and risks. If you're investing, the returns are certainly an interesting part of the conversation. Much like when your math teacher told you about the immense power of compound interest, the goal in modeling returns is to estimate with some degree of certainty how much money your money can make.

The risk side of the equation is about what happens if something blows up. On the macro scale, you're thinking about the next recession and the possible collapse of certain sectors. At the micro scale, you're trying to think about what happens is a specific investment implodes.

The Tools for Handling Returns and Risk

Ultimately, the idea is to use computational power to model returns and risks. By running the available information about your investments and finances through millions of possible scenarios, you can get a sense of what the optimal and pessimistic outcomes are likely to be.

Notably, you can also identify where to put your money. For example, someone with a strong risk appetite might focus on investments in startup companies that often have big rewards for big risks. Conversely, someone on a more stable wealth management track may focus on investments that return dividends, interest, and other forms of steady income.