Understanding bottom-up investing
A bottom-up investing strategy begins on the other end of the spectrum. Rather than surveying the global environment, investors start with individual companies. They may study the company’s balance sheet, income statement, or reports to learn its strengths, weaknesses, and overall financial stability. Once they find a strong option with solid prospects compared to others in its niche, they will invest in the company.
A potential drawback to the bottom-up investing strategy, however, lies in the risk of overlooking macroeconomic factors. Investors taking the bottom-up approach may not focus on the environment the company is going to be operating in, explains Wren. A great company could have a solid balance sheet and income statement, but if it enters an environment that is not ideal for its growth and performance, its bottom line could suffer.
Finding a balance
When it comes to investing, “the ideal situation is to have some combination of top-down and bottom-up investment strategies,” says Wren.
It’s good, on the one hand, to understand an individual company before investing in it. By understanding its financial reports, you increase your knowledge of whether or not the firm is in a solid financial position or if it has a lot of debt relative to its peers.
At the same time, having an understanding of where the economy is going is key, adds Wren. Some companies are more sensitive to changes in the environment than others. Utility stocks, for instance, might remain stable in a down economy. “You’ll heat your home whether the economy is good or bad,” says Wren.
Discuss these two investment strategies with your Financial Advisor, who can put them in the context of your overall portfolio and provide advice and guidance about areas of opportunity and how you may need to adjust your strategy based on economic conditions.