The Motley Fool

What Is: Top-Down Investing

Top-down investors try to build a “big picture” of the world and the financial landscape. They try to analyze what is happening in global economies, global politics, global demographics and so on. They then break down what they have identified into various components to look at specific industries that could be affected by what is happening.

For instance, predictions of China’s economic growth led many to predict that the personal wealth of Chinese consumers would rise. The upshot was that Chinese shoppers could eventually desire the same goods that consumers in developed economies demanded. Consequently, top-down investors might infer that retailers and manufacturers of up-market and luxury goods could see a rise in demand for their products. The top-down investors would then try to identify businesses that are positioned to capitalise on the market.

Another example could be the systematic cut in interest rates by developed economies. A top-down investor may infer that low financing costs could have a positive impact on the housing market by making it easier (and more affordable) to buy properties. They may therefore focus their search for investing opportunities amongst property developers, house builders and Real Estate Investment Trusts.

In the main, top-down investors use their global view of the world as a starting point to identify promising countries, sectors and industries for further investigation. Some top-down investors may stop their search once they have identified suitable investing areas and proceed by investing using Exchange Traded Funds. Others may drill down into the industry to look for particular companies to invest in.

Top down investing can be useful for investors who find it difficult to identify the right stocks from the vast universe of shares to buy. So, if you ever find yourself asking “What should I buy now?”, then a top-down approach could be a good place to start your search.