18.05.2016

Top down or bottom up?

by FIDA

There are at least two possible approaches to the portfolio selection process that are philosophical opposites but sometimes can complement each other.

 

On the one hand, the Top Down approach goes from the general—the asset allocation among the macro asset classes—to the specific through increasingly granular categories of financial instruments, ending with stock picking.

400

On the other hand, the Bottom Up process goes the opposite way, ignoring global trends and focusing instead directly on the outlook for individual stocks. This way, the asset allocation becomes the aggregation of specific decisions concerning individual instruments or relatively small market sectors.

400

 

The former suits best long-term portfolios based on the strategic asset allocation, i.e. the one supported by considerations on systemic factors such as the correlations among asset classes or the macroeconomic outlook. The latter is usually the staple of more active and aggressive approaches seeking to track, and sometimes anticipate, short-term trends.

That said, investing strategies often combine different techniques with varying degrees of flexibility. In these cases, investors usually start from an overarching strategic asset allocation to determine the core structure of the portfolio, and then use bottom-up approaches that leverage contingent and/or particular events to temporarily adjust weightings between asset classes.

Luca Lodi
FIDA Research Centre


Events


Semptember 2015
  • 22
    Jun

    Benjamin Graham once said: "The essence of investment management is the management of risks, not the

  • 22
    Jun

    Wo liegt die Zukunft des Investierens und wie kann man sich in der steigenden Komplexität der Produ

  • 22
    Jun

    The event, reserved only to qualified investors, is aimed at private bankers, asset managers, famil

  • 28
    Jun

    Only a little more than half a year is remaining until implementation of PRIIPs and MiFID II, and th

  • 30
    Jun

    Lo Shipbrokers and Shipagents Dinner è uno degli eventi più importanti nel panorama mondiale della

See All

newsletter

Updates and news from MarketPlus

Market Overview
SMI® PR9022.530,41 %
LYXOR DAX INAV121.823-0,10 %
FTSE MIB Index20906.78-0,79 %
FTSE 1007427.62-0,27 %
CAC 405255.94-0,35 %
S&P 5002434.65-0,04 %
NASDAQ Composite6226.0684-0,13 %
HANG SENG INDEX25674.53-0,08 %
Powered by Yahoo Finance