Quite simply, bottom-up investing focuses on individual securities rather than overall movements in the securities market or the outlook for particular sectors.
The bottom-up approach assumes that individual companies can be successful even in an industry that is not performing very well. This is the opposite of another approach, called top-down investing. Making informed decisions on the basis of a bottom-up investment strategy requires a thorough examination of the business in question, says Mark Cortazzo, Certified Financial Planner and Senior Partner at MACRO Consulting Group.
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A bottom-up investment approach focuses on the analysis of individual stocks. In bottom-up investing, therefore, the investor focuses their attention on a specific business rather than the industry in which that business operates, or the economy as a whole, Cortazzo said. This includes becoming familiar with the company’s products and services, its financial stability, and its research reports.
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Bottom-up investing is likely to provide better returns over longer time frames for investors, but at the same time, it can have extreme variations compared to market returns. Therefore, these investors generally tend to focus on the long term.
Cortazzo explains that a bottom-up investor will overlook general economic and industry conditions and instead focus on selecting a stock based on the individual attributes of a company. So they tend to be less diverse because general industry conditions are not of concern.
As an investor it is very important to take the time to better understand how to approach the market from a long term perspective.
Therefore, when looking to build your investment portfolio, an important thing to keep in mind is how an asset will adapt to your financial needs, Cortazzo explains.
That’s why it’s important to remember that before you start investing, you need to determine your financial goals. Think about what you want to accomplish with your money and how your investment portfolio fits into the overall financial plan.