Write one page answering the following:
When looking to invest corporate dollars, do you think the top-down approach is preferred over the bottom-up approach? Why or why not? Use resources to support your reasoning.
In what way(s) might you consider implementing the bottom-up strategy within aninvestment portfolio, which includes stocks from Apple, Macys, Caterpillar, Northern Trust & Consolidated Edison?
How can you justify applying the top-down approach in an investment portfolio?
Provide a 1 page reply to the following two postings, basically remark on aspects each discussed that you perhaps did not consider.
Need Response to: I feel that when it comes to investing corporate dollars, it would be more fiscally prudent to use a top-down approach. As the video by Bracker explains, it is a more of a drill-down approach where multiple factors are analyzed. The macroeconomic environment is essential in the top-down approach because it looks at GDP growth, employment, fiscal and monetary policy, inflation and interest rates (Bracker, 2011). By analyzing whether the economic in the next 3-5 years is going to be stronger or weaker we can then determine which industries to focus on. Some industries are not as reactive to a weaker economy (Kellogg's was the example he used). And if the economy shows growth potential, then automotive or building-related stocks may yield a higher than normal return.I think implementing a bottom-up strategy for our final project portfolio may work well for Apple, but I'm not sure that strictly using this approach is appropriate. I don't think you can create a portfolio in a vacuum without considering economic factors that can affect the company/industry/economy. You need to deep-dive into each company and look at what's happened with them as well as what may potentially happen to them; new CEO, store closings (using Macy's as an example), how are they managing debt
For our final project, even though we were assigned the companies to invest in, this still does not preclude using a top-down investment approach. Competition has a large effect, and when it comes to retailers such as Macy's, competition is fierce not only from brick and mortar retailers, but online retailers as well. If we analyze where the economy is going over the next few years, we can apply a top-down investment approach particularly for asset allocation of our portfolio.
Need Response to: "Top-down investing is an investment approach that involves looking at the overall picture of the economy and then breaking down the various components into finer details. After looking at the big-picture conditions around the world, analysts examine different industrial sectors to select those that are forecast to outperform the market. From this point, they further analyze stocks of specific companies to choose potentially successful ones as investments" (Investopedia.com, 2017).
I think that the top-down approach is the more widely used strategy for investing. It is a way to go from macro to micro, focusing on the features that are most important to the individual. If someone wants to look for homeruns, they can focus on the market as a whole to see where the most rapid growth has occurred. They can then focus on the tech sector of that market, and then look at several companies that have been growing at rapid pace, and hope to hit a home run with one of the companies. Likewise, if the person wanted to sort their stocks out by starting at the top and then factoring for certain risks, and then investing in a way that minimizes the chances of these risks having a major impact on their portfolio as a whole, they can do so.
I think that the bottom-up approach would occur more in smaller investment opportunities. Personal investment might come from areas of interest. Someone who really likes sports might want a safe, fun investment in Nike, a company that they see in their everyday lives. They might want to invest in the company that manufactures their car, because they feel that they make a superior product than that of the competitor. So I do feel like bottom-up approach is used for investment strategy, I think that it is on a smaller scale. I think that it is important to factor down trough certain criteria to get to your goal portfolio, instead of the contrary. Investing on personal preference based on interests can be more enjoyable, but may be riskier or less of a profitable endeavor.
For the final product, in a lot of ways we are using the bottom-up strategy, as we have already chosen the firms that we are investing in. We then used their performance to check the rate of return on the investment portfolio as a whole. In a sense, this is bottom-up. On the contrary, had we been asked to pick a blanket five investments to pick to choose a well-rounded growth portfolio, than this would have been more of a traditional top-down approach. We would have had to start by looking at the market as a whole for its trends, and then break down different factors as to which market sectors to diversify into in order to create a risk adverse portfolio that does a good job of representing a good sample of the entire stock market.