What is 'Top-Down Investing'

Top-down investing is an investment analysis approach that involves looking first at the macro picture of the economy, and then looking at the smaller factors in finer detail. After looking at the big-picture conditions around the world, analysts next examine the general market conditions followed by particular industrial sectors to select those that are forecast to outperform the market. From this point, they further analyze the stocks of specific companies to choose potentially successful ones as investments by looking last at a particular company's fundamentals. Top-down approaches prioritize macroeconomic or market-level factors most.

Top-down investing can be contrasted with the bottom-up approach, which starts first with a company's fundamentals, where most of the emphasis is put, and then works its way up through the structural hierarchy, looking at macro-global economic factors last.

BREAKING DOWN 'Top-Down Investing'

When looking at the bigger picture, investors use macroeconomic variables, such as GDP, trade balances, currency movements, inflation, interest rates and other aspects of the economy. Then it works down a level to identify high-performing sectors, industries, or regions within the macroeconomy. Based on these factors, top-down investors allocate investments from efficient diversified asset allocations, rather than by analyzing and betting on specific companies. For example, if economic growth in Asia is better than the domestic growth in the United States, an investor might shift his assets internationally by purchasing exchange-traded funds (ETFs) that track specific Asian countries.

Bottom-up investing is an opposite strategy to top-down. Practitioners of the bottom-up approach ignore macroeconomic factors and instead look at individual microeconomic factors that affect specific companies they're watching. For example, a bottom-up investor chooses a company and then looks at its financial health, supply, demand and other factors over a specified time period. Although there is some debate as to whether the top-down approach is better than the bottom-up strategy, many investors have found top-down useful in determining the most promising sectors in a given market.

Top-down investing may produce a more long-term or strategic portfolio, including more passive indexed strategies, while a bottom-up approach may lead to more tactical, actively managed strategies.

An Example of Top-Down Investing

For example, UBS hosted the 2016 UBS CIO Global Forum in Beverly Hills, Calif., to help investors navigate the current economic environment. The forum addressed macroeconomic factors that affect markets, including international government policy, central bank policy, international market performance and the effects of the Brexit vote on the global economy. The way in which UBS addressed these economic factors supports a top-down investment strategy.

Jeremy Zirin, a wealth manager who is part of UBS Wealth Management Americas, reflected on the benefits of top-down investing on June 28, 2016. Consumer discretionary stocks looked attractive to Zirin and his team, who implemented a top-down approach to identify strong consumer discretionary investments. His team took into account the above macroeconomic factors and saw that consumer discretionary was insulated from international risks and was bolstered by American consumers' spending power. Identifying this sector allowed him and his team ultimately to identify Home Depot as a good investment.

RELATED TERMS
  1. Top-Down Analysis

    Top-down analysis is an investment strategy that looks at the ...
  2. Bottom-Up Investing

    Bottom-up investing is an investment approach that focuses on ...
  3. Investment Analysis

    Investment analysis involves researching and evaluating securities ...
  4. Financial Analysis

    Financial analysis is the process of assessing specific entities ...
  5. Macroeconomics

    Macroeconomics is the study of how the aggregate economy behaves. ...
  6. Factor Investing

    Factor investing is strategy in which securities are chosen by ...
Related Articles
  1. Investing

    Are You a Bottom-Up or Top-Down Investor?

    Both bottom-up and top-down approaches are used to pick stocks. Here's a look at how they work.
  2. Investing

    A Top-Down Approach to Investing

    Use a global view to determine which stocks belong in your portfolio with the top-down approach.
  3. Managing Wealth

    The Key To High Returns Is A Disciplined Strategy

    Learn about different investment strategies and how to pick the right one for you.
  4. Investing

    Analyzing Mutual Fund Risk

    Find out whether a fund's performance is a result of the manager's abilities or just a fluke.
  5. Financial Advisor

    Finding the right stocks and sectors

    The top-down investment strategy depends on economy and market strength. Find out what you should know before jumping in.
  6. Insights

    Macroeconomics

    Find out everything you need to know about macroeconomics.
  7. Managing Wealth

    Microeconomics vs. Macroeconomics Investments

    Find out why investors are better off ignoring macroeconomic forecasts and should instead focus on the lessons that microeconomics can teach them.
  8. Small Business

    5 Ways to Keep Your Business Going in Hard Times

    Find out how to help your small business survive through difficult economic times. Learn some tips that owners can follow to help turn things around.
  9. Investing

    Spread Out Risk With Sector-Based ETFs

    These ETFs take the sector rotation strategy from institutional investors and puts it in your hands.
  10. Investing

    The Workings of Equity Portfolio Management

    Portfolio management is a necessity, not an afterthought, in achieving analytical efficiency.
RELATED FAQS
  1. What is the difference between accounting and economics?

    Discover the difference between accounting and economics by comparing and contrasting the financial discipline of accounting ... Read Answer >>
  2. Passive vs Active Portfolio Management

    Understand the difference between active portfolio management and passive portfolio management, and how each strategy benefits ... Read Answer >>
  3. Why are the factors of production important to economic growth?

    Find out why the factors of production are critical for real economic growth, where wages rise and consumer goods costs fall ... Read Answer >>
  4. Which economic factors most affect the demand for consumer goods?

    Understand how key economic factors such as inflation, unemployment, interest rates and consumer confidence affect the level ... Read Answer >>
  5. US stock market in the economic downturn

    Stock market is said to be the barometer of its economy. But there are many other factors that can lead to a disparity between ... Read Answer >>
Trading Center