Using the top-down approach of fundamental analysis
The top-down approach of fundamental analysis
means basing your decisions on the economic outlook and what this could mean for individual shares.
By following this approach, you focus on what trends you’d expect to emerge from areas such as growth, inflation, interest rates and currency movements, Cris Sholto Heaton in Money Week
You’d then try to work out ways to profit from these macroeconomic trends. For example, if the South African economy started to pick up speed, you could invest in growth shares and sell defensive shares.
How the bottom-up approach differs
This is very different from the top-down method.
If you follow a bottom-up approach, you look to individual securities instead of economic trends.
For instance, you think a particular stock is going to raise its dividend over the coming years so you invest in it.
Of course, a company’s performance will tie into what’s going on in the economy. So following this investment strategy means you still need to take into account what’s happening in the economy.
Which fundamental analysis method is best?
The success of these types of analysis comes down to what you’re investing in.
If you want to focus on currencies and commodities, a top-down approach tends to be best as returns depend on what’s happening in the economy.
But when it comes to shares, the bottom-up approach tends to win as the stocks you pick is crucial.
Top-down investing may appear easier, but it’s harder than it looks. A bottom-up strategy may yield you more success over the long run.
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