Research Process: Top-Down Or Bottom-Up Analysis?

The terms "top-down" and "bottom-up" describe a process by which investors go about analysing the financial markets and proceeding to choose desired investments. Some investors combine both approaches in their process; the important thing to note here is that no one way is better than the other.

iFAST Research Team
iFAST Research Team07 Dec 2016 0 Views
Research Process: Top-Down Or Bottom-Up Analysis?

You may have once heard of terms like "top-down" and "bottom-up." In the investment world, these terms describe a process or means by which professional money managers or investors go about analysing the financial markets and proceeding to choose desired investments.

A top-down investor is someone who looks at the "big picture" view of the world first – looking at the global economy and developing a view on how it is first, before "heading down" to various geographic regions, countries or sectors and then proceeding to develop a view on each one of these segments and seeing which ones are more attractive for investment. Once a top-down investor has picked countries or industry groups that he or she favours, the investor will then "head down" to look at fundamentals of various companies and scrutinising them before deciding to pull the trigger. It is important to note that a top-down investor would find suitable investments based on his or her outlook on the "big picture." If he or she thinks that a global economic recession is imminent, a pursuit of a defensive investment strategy (like purchasing stocks of companies in defensive sectors) could guide the rest of the search process.


Conversely, a bottom-up investor is essentially employing a process that is the reverse of a top-down investor, beginning first by looking at the fundamentals of a company before "heading up." Proceeding to develop a view of any industry or sector group is only done after developing a view on the various stocks that operate within a particular industry or sector group. In practice, most bottom-up investors may not pay attention to the macro events, focusing on the strengths of individual stocks and expecting them to outperform their peers regardless of what is happening to the economy. Adopting such an approach would see investors remain unrestricted in the types of stocks they will invest in during a global economic recession, as long as they are fundamentally sound.


Some investors combine both approaches in their process; the important thing to note here is that no one way is better than the other. There is no fixed method, rule or golden formula.

 

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