Investment Analysis

What is an 'Investment Analysis'

Investment analysis is a broad term that encompasses many different aspects of investing. It can include analyzing past returns to make predictions about future returns, selecting the type of investment vehicle that is best for an investor's needs or evaluating securities such as stocks and bonds for valuation and investor specificity.

BREAKING DOWN 'Investment Analysis'

Investment analysis can help determine how an investment is likely to perform and how suitable it is for a given investor. It is key to any sound portfolio management strategy. Investors who are not comfortable doing their own investment analysis can seek professional advice from a financial advisor or other financial professional. Investment analysis can also involve evaluating past investment decisions in terms of the thought process that went into making them, how the decision affected a portfolio's performance and how mistakes can be regarded and corrected. Key factors in investment analysis include entry price, expected time horizon and reasons for making the decision at the time.

Performing Investment Analysis

In conducting an investment analysis of a mutual fund, an investor looks at factors such as how the fund has performed compared to its benchmark. The investor can also compare the fund's performance, expense ratio, management stability, sector weighting, style and asset allocation to similar funds. Investment goals should always be considered when analyzing an investment; one size does not always fit all, and highest returns regardless of risk are not always the goal.

Types of Investment Analysis

When making investment decisions, investors can use a bottom-up investment analysis approach or top-down approach. Bottom-up investment analysis entails analyzing individual stocks for their merits, such as valuation, management competence, pricing power and other unique characteristics of the stock and company. Bottom-up investment analysis does not focus on economic cycles or market cycles firsthand for capital allocation decisions but instead aims to find the best companies and stocks regardless of economic, market or particular industry macro trends. In essence, bottom-up investing takes more of a microeconomic approach to investing rather than a macroeconomic one, which is a hallmark of top-down investment analysis.

Top-down investment analysis emphasizes economic, market and industrial trends before making a more granular investment decision to allocate capital to specific companies. An example of a top-down approach is an investor evaluating industries and finding that financials will likely perform better than industrials; as a result, the investor decides his investment portfolio will be overweight financials and underweight industrials. The investor then proceeds to find the best stocks in each sector. On the contrary, a bottom-up investor may have found that an industrial company made for a compelling investment and allocated a significant amount of capital to it even though the outlook for its broader industry was negative.

Other investment analyses include fundamental analysis and technical analysis. Fundamental analysis stresses evaluating the financial health of companies as well as economic outlooks. Technical analysis stresses evaluating patterns of stock prices and statistical parameters.

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