A tops-down approach examines the macro-type factors of the economy first. Then you work your way through lower levels of detail until you are finally looking at the individual investment. For instance, let’s say you are looking at allocating your portfolio towards stock. If you are a tops-down investor, you wouldn’t start thumbing through potential stocks to buy until evaluating other factors that will guide how much and what types of stocks to buy.
A bottoms-up approach means finding the absolute best security in your opinion, regardless of how attractive the overall markets appear at the time. The most common example of a bottoms-up investor is one who is looking to find the absolute best stock that fits a given category or style.
Many factors drive the price of a stock beginning with the particular characteristics. These are virtually countless in number, but commonly include the company management, revenue growth, profits, dividend yields, etc. All of these things make an individual stock unique in nature, like fingerprints and no two are the same. The purpose is to identify opportunity by selecting a stock that has a “better” make-up than its peer group and that trades at an attractive price.
Issues outside the company are also important to the price movement of the stock. The sector of the economy is very important. What isn’t always intuitive or apparent is that the size of the company based on market capitalization also matters greatly. Size -large, mid- or small cap — and style — growth or value – go in and out of favor over time and the stocks that perform the best tend to belong to the size and style most in favor that day.
Now that you have a grasp on each approach, which one is more important? Ultimately, this is for you to decide which is right for you. Consider a study conducted by the University of Chicago and Benjamin King that objectively finds a disconnect investors place on each approach. The average investor tends to spend 80 percent of their time in the analysis of their individual stock holdings looking at income statements, balance sheets or whatever they deem important. However, the study demonstrates that 80 percent of the actual risk and return in the stock is attributed to those factors that are outside of the individual stock.
The biggest investment mistakes we find seem to repeat themselves every year. Perhaps the most common is becoming fascinated with the company. I have done it myself with Harley Davidson. Forcing yourself to focus on the big picture – the tops down – can be tiring and dull and as a result, commonly disregarded.
Joseph “Big Joe” Clark is a certified financial planner and the managing partner of the Financial Enhancement Group, LLC. Big Joe can be reached at bigjoe@yourlifeafterwork.com, or (765)-640-1524.
Local Business
Related Photos
Discussion
Big Joe Clark: Tops down or bottoms up?
- Local Business
-
-
Boxes outside Aldi catch fire
A small fire outside the Aldi grocery store in Anderson caused an evacuation of shoppers and employees.
-
Remy to build Chinese manufacturing plant
Remy International Inc. plans to build a manufacturing plant and engineering center in Wuhan, China, company executives announced in Chicago earlier this week.
-
Susan Miller: Looking for a summer vacation vocation
Summer vacation is often a synonym for summer vocation, particularly for teenagers.
-
Frankton woman will be on online car ad
Tina Collins giggled as she sped around the track in a go-kart at Applewood Raceway. Her son, Owen Foit, 18, smiled broadly as he threatened to pass her while her daughter, Tarah Collins, 14, tried to catch up from behind.
-
Senate candidate visits Alexandria ethanol plant
In his first post-primary visit to Madison County on Wednesday, Democratic U.S. Senate candidate Joe Donnelly visited the Poet Biorefining plant here to underscore his support for energy independence and Indiana corn farmers.
-
Corporate sponsorships help Elwood YMCA expand
The YMCA has been a part of the Elwood community for 20 years, but a new series of partnerships coupled with a $60,000 renovation are strengthening those bonds.
-
TIF expansion proposal gains more support
Before being able to expand a large consolidated tax increment financing district, the city’s economic development department has to get approval from several government bodies.
-
Emmett Dulaney: Today’s actions hurt tomorrow
I have no recollection of why, but for some reason when we were kids my brother could not stand Catfish Hunter.
-
Hoosier Park revenue posts 4 percent increase so far this year
Gambling revenue from Indiana’s 13 casinos has dropped the past two years and faces a third year of decline in 2013. But revenue at Hoosier Park & Casino grew at rate of 4 percent so far this year, said CEO Jim Brown.
-
Families get help with weatherization, energy assistance
Glenn Skinner installed the “modern blower” furnace himself more than 53 years ago. As last winter began to approach, Skinner and his wife began to worry that it was finally going to “blow” and they’d be without heat.
- More Local Business Headlines
-
Boxes outside Aldi catch fire
