You may have heard the terms bottom up and top down used to describe approaches to investing. You may even use one of these methods of stock selection yourself. The two approaches involve opposing philosophies used to determine companies in which to invest.
A bottom-up approach involves searching for outstanding performance of individual companies before considering the impact of economic trends on that company’s industry. You may identify the companies from research reports, stock screens, news accounts or personal knowledge of the products and services offered. The bottom-up approach assumes that individual companies have the potential to do well even if their industry or the overall market is not performing at its peak.
The top-down style is one in which an investor first looks at trends in the general economy, then selects industries and, finally, companies that may benefit from those trends. For example, if you think inflation will stay low, you might be attracted to the retailing industry since consumers’ spending power is often enhanced by low inflation. A top-down investor then might look at major retailers to see which company has the best earnings prospects in the near term.
Which method most closely reflects your own investment philosophy, bottom-up or top-down? If you’re not sure, your financial adviser can help you determine which approach, or combination of approaches, may be most suitable for you, depending upon your financial goals and risk tolerance.
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Gary W. Plum, first vice president and financial adviser at Morgan Stanley Smith Barney, 1401 Manatee Ave W,, Suite 1110, Bradenton, can be reached at (941) 714-7939.