Top Down Investing or Bottom Up...In the End, We Beleive You Need Both

When it comes to selecting companies to invest in, there has been much debate on the top down and bottom up approaches. With the top down approach, investors typically study the economic trends, and then determine the industries and companies they think are likely to benefit the most. For example, suppose you believe there will be a drop in interest rates. Using the top-down approach, you might determine that the home-building industry would benefit the most from the macroeconomic changes and then limit your search to the companies in that industry. Conversely, bottom up investors typically conduct extensive research on individual companies. As long as they think the company’s prospects look strong, these investors often conclude that the economic, market or industry cycles are of less concern. What constitutes "good prospects," with regards to bottom up investing, is a matter of opinion. Some investors look for earnings growth while others find companies with low P/E ratios attractive. In addition there are numerous other factors that investors could use to evaluate the investment worthiness of a particular company.

The top down and bottom up approaches are two distinct and fundamentally very different methods to investing. There are great advantages and drawbacks to both methodologies, but too much reliance on only one may keep your portfolio from reaching its maximum potential. There are literally tens of thousands of stocks out there to choose from.

Investors can combine the two approaches by applying top down analysis on asset allocation decisions while using a bottom up approach to select the companies they believe fit the requirements of both kinds of research.

The combination of strategies is called Tactical Diversification and may help investors strike an attractive balance between seeking maximum capital appreciation and managing downside risk.






Past performance is no guarantee of future results. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities, markets or issues mentioned. The information contained herein, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.