18 Apr 2019
Which approach is better? Top-down investing or bottom-up investing? What are some reasons for choosing one approach over the other?
Top down investing focuses on macroeconomic factors. So an investor might look at countries with the highest growth rates or growth potential, followed by that of the industries and then start to select stocks from there.
They may also pay more attention to economic cycles. Since they are focused on more broad economic trends, many of them tend to be focused on economic trends than individual performance of stocks. They try to take advantage of such broad trends using ETFs. An advantage is that these investors may tend to benefit from a more diversified portfolio within a certain sector or industry. However, a disadvantage could be that the composition of the portfolio is not properly controlled where it is not diversified across uncorrelated secotrs.
Bottom-up approach would focus their analysis on individual companies and then build a portfolio from there. They will probably do in-depth research and analysis on each company and try to find which stocks are undervalued or a good buy to add to their portfolio. An advantage that they have is that their portfolios can be quite well diversified across different industries. A disadvantage is that they need to look for the right attributes and cover enough grounds sufficiently to succeed in the long run.
Hello, personally I would not say that there is a better approach as I find that it is essential to engage in both ways in order to be able to reap the best outcome.
Top-down investment is more for those who are interested in the macroeconomic environment, such as looking at the outlook of the country. While bottom up investment would be looking at the specific companies. For me, I feel that it is essential to look both ways in order to make the best decision on which stock or what to invest in.
Personally, I prefer bottom-up investing. I found that with bottom up investing, I make lesser mista...
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