There are various ways to invest your money. Many times, short term traders like to use technical analysis to find statistical investment opportunities. Meanwhile, the long term traders usually use fundamental analysis to know the undervalued companies.
Other than the different analysis that traders use, investment strategies also differ by the way traders use the chart patterns or indicators. They can use a bottom-up or top-down investing.
Find the differences between bottom-up or top-down investing below.
Defining Top-Down Investing
With top-down investing, the investor starts their analysis by looking at the macroeconomic factors. They do that before they analyze the individual stocks.
For instance, top-down investors can look for the fastest-growing economic countries, first. After that, they will analyze the individual sectors inside the economy trying to find the best opportunities. Then, they can start to look at the individual companies in these specific sectors.
Other than these factors, investors usually also look at other factors, like business cycles or economic.
Many of top-down investors are macroeconomics investors. They focus on getting profit out of large trends with exchange-traded funds (ETFs), instead of individual equities.
This type of investment can gain higher turnover than bottom-up investment. That is why this strategy is about momentum and short-term gains. Top-down investors can get access to various portfolios of assets in a region, country, or sector.
The biggest drawback of this type of investment is that it gives minimum control for the investors unless they invest in equities or bonds. Besides, it also gives concentration risk for the investors’ portfolio if they only focus on one country or sector.
Defining Bottom-Up Investing
With the bottom-up approach, investors look at the individual companies first, then build their portfolio according to the specifics attributes they have found.
For instance, bottom-up investors will screen for the shares of stock with a low price-earnings (P/E). Then, after they find several companies with that requirement, they will take a deeper look and evaluating them based on other fundamental criteria.
Most of the bottom-up investors are microeconomic investors. They focus on specific contributes from companies in building their portfolio.
These people usually also like to buy and hold since they do stock research in a long time. Thus, their investment takes a longer time. Yet, this investment is effective in managing risk and to give risk-adjusted returns.
It gets more profit with a well-diversified industry and location of the company. Yet, this investment requires the underlying attributes they are looking for to produce return above the average to be successful.