Bottom Down and Top Up Investment Strategies

Boca Raton, Florida Stock and Bond Investment Fraud Lawyer, Russell L. Forkey, Esq.

Regardless of you investment sophistication, investment concepts that invariably come up in conversations with investment advisors and representatives of brokerage firms is the phrase “bottom up” versus “top down” investing.

The purpose of this post is to provide the reader with a general understanding of these two investment concepts. This discussion is not designed to be complete in all material respects. We render no opinion as to the validity of these concepts. Thus, the below information is being provided for educational purposes only. Nothing in this post should be considered as legal or investment advice regarding the contents hereof. If you have any questions relative to “bottom up” versus “top down” research, please contact a qualified attorney or investment professional.

When investment professionals refer to top-down investing, they generally mean the use of macroeconomic or overall market factors as the primary metrics to drive their portfolio construction. Bottom-up investing, by contrast, starts from the micro end by looking at key items related to individual firms. Put another way, top-down research involves taking a look at the big picture while bottom-up investing starts by focusing on individual companies. There is no wrong or right way, just individual preferences. Consequently, some people use a combination of both.

Although, not set in stone, the top-down approach usually starts with a world view. What is the health of the global economy not only as it relates to developed nations but also emerging countries. Next, you could look at the economic trend in a region. Then you could take a look at the United States economy. The final step in macro-analysis would be to analyze the major stock indexes such as the S&P 500 and Nasdaq.

From the above, you can determine your asset allocation percentages. But you are still not done. Then you have to determine which segment(s) of the market that you want to focus on. Once this has been completed, the final step is to look at individual stocks from different prospectives.

Generally, there are two ways to do this, fundamental or technical analysis. Please follow the links for a discussion of these to analytical styles.

Bottom-up investing, in its purest sense, is just the opposite of top-down. As indicated above, whether you use either or both is more personal preference than anything else. Consequently, If in your discussions with your investment professional, he or she is not aware of, does not fully understand these terms or utilizes a view of top-down or bottom-up with which you disagree, you, you should probably think twice about the relationship.