There is no one correct way to develop an investment portfolio. Various types of strategies are available for you to choose from to guide your investment decisions. Each type of strategy will focus on certain factors more than others. One common investment strategy you may want to consider is bottom-up investing.
What is bottom-up investing?
Investors who apply the bottom-up approach will focus on fundamental analysis of an individual stock while deemphasizing the importance of macroeconomic factors and economic cycles. This type of investment strategy will focus on a specific company’s revenues, earnings, financial statements, products and services. Bottom-up investors will place more importance on these factors than analysis of the broader industry or the overall economic environment.
Theory behind bottom-up investing
The whole idea underpinning bottom-up investment strategies is that a strong company will be successful in the long-term regardless of the health of the industry at the moment or the current macroeconomic environment. Usually, these types of investors will employ a long-term buy-and-hold strategy when managing their stock portfolios. This is based on the theory that even during hard economic times for a specific industry the individual firm with strong fundamentals will be at least less hurt than competitors. Then, when economic conditions start to improve the firm will emerge as a leader in the industry.
Microeconomics vs. macroeconomics
Bottom-up investing focuses mainly on microeconomic factors as previously explained. On the other hand, this does not mean macroeconomic factors are completely ignored. Usually most bottom-up investors will eventually integrate macroeconomic analysis into their decision-making process. However, the analysis of investment assets always starts with fundamental analysis at the individual company level.
What should bottom-up investors look for in a company?
Each bottom-up investment strategy is different and can vary widely as far as which microeconomic factors you will look at. It may even depend on which industry the individual company operates within. For example, a cutting-edge marketing strategy may be more important in some instances while a strong organizational structure may be what convinces an investor in a different scenario.
On the other hand, you should also be looking out for signs a company is a risky investment as well. This may be the case with a company having accounting irregularities or weak earnings compared to the rest of the industry. These may be hints there is something not right with the company which can make many bottom-up investors wary of investing in the particular stock.
Should you use a bottom-up investment strategy?
Each investor has to formulate an investment strategy specifically tailored to fit your individual investment objectives. Bottom-up investing may be the right strategy for some who are more long-term investors and plan to hold their portfolio assets for an extended period of time. However, you will want to consult with a professional financial advisor to determine what type of investment strategy will work for you best.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any opinions are those of the author and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Raymond James and its advisors do not offer tax or legal advice. You should discuss any investment decisions, tax or legal matters with the appropriate professional.