Top-down or a Bottom-up basis to choose the best stocks for your portfolio

 Top-Down Active Management

Asset allocation

At this stage of the top-down process, asset managers try to determine which areas and asset classes are most likely to produce the most attractive risk-reward returns.

As an example, they may decide that the US stock market is going to outperform, so they allocate say 50% of the portfolio to the US stocks. ( We will talk about choosing the right stocks on next steps )

Also, they may decide that the Crypto market will enter another bull market and they also allocate say 5% to Crypto. The same for commodities $OIL  FOREX, etc.

Sector selection 

Depending on what stage of the economic cycle we are we should choose different stocks.

For example at the start of a bull run, banks could be a good sector while at growth phase leisure or airlines are the best and at the end of the bull market, we may look at pharmaceutical shares, etc.

Stock selection

After choosing the sectors you should use your fundamental or technical analysis skills to find the best stocks for your portfolio.

Fundamental analysis: For example by looking at companies' balance sheets, earnings reports, etc. to find undervalued stocks.

Technical analysis: By looking at charts and trends to find the best entry points.

Bottom-Up Active Management

The main focus here will be solely on the individual stock's unique attractions. The stock selection is based on specific criteria that asset manager applies to their strategy. For example, different fundamental ratios to find out the companies based on their value, growth at a reasonable price, momentum, and contrarianism.

For example:

• By looking at company reports they may find that $NAS is undervalued and could be a good investment.
• By looking at steady growth they may decide $AAPL should be included in the portfolio.
• By looking at a large increase in $STMP price, it will be selected based on the momentum.
• Or they may choose $HMMJ as they believe going against the trend will bring high returns.

I am a fan of the top-down method as it suits my strategy better and I feel more organised by implementing it.

By Nina