Top down and Bottom up Investing

Managing investment portfolios successfully requires Investment Analysis strategies. Investment analysis is a way for evaluation of assets and securities, industries, trends, and sectors to help determine the future performance of an asset we. Two of these strategies are called top-down and bottom-up investing.

BY SIRJAN KAUR KOHLI | 3 minutes read

Bottom up and top down investing are two vastly different ways to analyse and invest in stocks. Top-down investing is basically looking at big picture economic factors for making investment decisions, while bottom-up investing deals with company-specific fundamentals like financials, supply and demand, and the goods and services offered by a company.

While there are advantages to both methodologies, both of these approaches have the same goal: To identify great stocks.

The top-down approach of investing focuses on the bigger picture, or how the overall economy factors drive the markets and, ultimately, stock prices. They will also look at the performance of sectors or industries in general. These investors think that if the sector is doing well, chances are that the stocks in those industries will also do well.

Top-down investment analysis includes:

Economic growth or gross domestic product (GDP) both in the U.S. and across the globe. Monetary policies by the Federal Reserve Bank including lowering or raising of interest rate, and inflation.

A money manager will examine the fundamentals of a stock . They will focus lesser on market conditions, macroeconomic indicators, and industry fundamentals. Instead, the bottom-up approach focuses on how an individual company in the sector  performs compared to specific companies within the sector.

Bottom up includes financial ratios, cash flow and revenue and sales growth.