What is the top down approach??

3A%2F%2Fwww.gravatar.com%2Favatar%2Fad516503a11cd5ca435acc9bb6523536&r=G /% By: IS

Date posted: 06.03.2009 (5:00 am) | Write a Comment (5 Comments)

Its something that you hear about when reading about stocks, the top down approach as well as the stock picking. What are they and which should you go by. This post will be a little introduction to both methods and who uses them.

First off the stock picking. This one is the easiest to understand as most investors (especially those not working in the investment field) will usually go through this. It is basically when you hear or read about a company, decide to read about it, either the financial statements, or analyst recommendations, etc. Then, you decide to either invest or not in the company. Fairly straightforward isnt it? There are obviously many things to be aware of when using stock picking, especially those that clog all of their picks in the same sector. Think you know who will find the next diamond or gold mine? Want to invest in the company? That is fine. But just remember that you do not want your retirement to hold on finding that one company. Ideally, you would not be investing too much in one specific field or industry.

Now lets move on to the top down approach. This where knowledge of the economy helps. Basically, someone using this method would be looking at data about the world economy. You can then find specific areas of growth or scenarios. Lets say you predict a rebound of the US economy in late 2009. Then, depending on the stage of the economic recovery you are targetting, specific industries or sectors usually perform better in those periods and you will be looking to invest in those areas. Once you have determined your scenario and industries, you will be looking at the specific companies that you expect to do well in this scenario. It is certainly not an easy or quick process to go through but you can usually be a lot more diversified and perhaps invest in companies that you never would have thought of initially. You could for example imagine that the US government will be investing a lot in the health care industry and getting a more central and public system under way. If that is the case, chances are that companies that can provide a more universal IT system that will replace each states system. In that case, you would probably be looking for an IT company that can provide a solution. In the same way, the energy policies of the Obama administration tend to promote green energy sources so you would think that solar energy companies could do very well in this environment. These are just a couple of examples but I think they illustrate how the top down approach might require more analysis but can provide with better picks in the long term

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This entry was posted on Wednesday, June 3rd, 2009 at 5:00 am and is filed under Commentary. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.