It’s important to get a full understanding of each company before making an investment decision. You can combine top-down and bottom-up investing when building a diversified portfolio. You might start with a top-down approach and look for a country that’s likely to see rapid growth over the coming year or two. Then you might take a bottom-up approach within that country by looking for certain investments, such as companies with low price earnings ratios or high yields.
If the investor likes what they see, they’re likely to invest—regardless of the state of the overall economy, or specific market the product is in. It’s this latter aspect—the separation of a company from its surrounding market, industry, and the world’s economy—which makes bottom-up investing so unique. An analyst seeking a top-down perspective wants to look at how systematic factors affect an outcome. In corporate finance, this can mean understanding how big-picture trends are affecting the entire industry. In budgeting, goal setting, and forecasting, the same concept can also apply to understand and manage the macro factors.
