Bottom-Up, Top-Down Investing

This approach focuses on the analysis of individual stocks. In bottom-up investing, the investor focuses his or her attention on a specific company rather than on the industry in which that company operates or on the economy as a whole. The bottom-up approach assumes that individual companies can do well even in an industry that is not performing very well. Making sound decisions based on a bottom-up investing strategy entails a thorough review of the company in question. This includes becoming familiar with the company’s products and services, its financial stability and its research reports.

Top-down investing is an investment approach that involves looking at the “big picture” in the economy and financial world and then breaking those components down into finer details. This is the opposite of “bottom-up investing”.After looking at the “big picture” conditions around the world, the different industrial sectors are analysed in order to select those that are forecasted to outperform the market. From this point, the stocks of specific companies are further analysed and those that are believed to be best positioned to be successful are chosen out of the sector for investment.

An investor may use different criteria when deciding to employ the top-down approach. For example, an investor may consider such factors as geography, industry sector and economic size. What is important with this approach is that a big picture perspective is taken first before looking at the details.

Although there is some debate as to whether the top-down approach is better than the bottom-up approach, many investors have found the top-down approach useful in determining what sectors are superior investment opportunities at that point in time.