Top Down Investing – Concept, Mechanism, Benefits, Drawbacks & more
Top Down Investment Strategy is a well-liked approach among traders. This article features – what it holds for you? Why investors pick this investment strategy?
Let’s take a dip into this article to know more about the Top Down Investing strategy.
The right strategy gives direction to the decision of an investor. Based on his/her goals, a strategic approach keeps helping the investor till the return becomes achievable.
It can help a trader in mitigating the risk coming on the way. Though, there’re plenty of strategies available around to grab a big chunk of profit from the financial market.
But, few of them are special and quite popular among traders due to their flexible and easy to use nature. A Top Down investing strategy is one of them all.
What is a Top Down Investing Strategy?
The Top Down investing strategy takes macro-economic factors into account.
An investor who relies on this approach grabs data from every source that can directly or indirectly impact an industry’s performance. E.g., the company in which they are planning to invest.
The strategy builds up the expectancy that a specific industry or sector will get a big boom in its market value.
Though, the strategy is on a hike among investor who holds a strong knowledge in macro-economics.
Whenever investors find a rising opportunity in the market, they follow this principle. In a nutshell, the Top Down strategy considers the global market.
What’s going on in the market? Everything is checked out, and the obtained data is then put into practice to finalize the industry or a sector’s position.
Unlike the Bottom-up investing strategy, the Top Down investing strategy act on a macro level.
The bottom-up investing strategy only thinks about the company’s performance and ignores the external factors.
On the other hand, instead of focusing on an individual company, the Top Down investing strategy cares for what’s going on in the global market.
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How does Top Down Investing Strategy Work?
The Top Down Investing Strategy follows a systematic approach to derive the right result.
For instance- it first gets an idea of a country’s economy. Is this the right climate for an investor to start investing? The strategy begins from all such points.
As compared to the countries with a developed economy, under-developed countries are the core focus of this strategy.
However, this is because emerging markets crop up with huge potential. Especially, countries with the highest growth rate in the economy are an attractive area for this strategy.
Since the Top Down investment approach focuses on the macro-economic factors, these few things bring easiness in the overall evaluations.
Let’s have a look at the factors that an investor must consider while using this strategy.
It’s the most critical measure for global investors. If you’re planning to invest in another country, you’ll first have to figure out many things before you step in.
One of the most critical factors that should point out before is the political situation.
It can directly impact the overall economy of that country. If your targeted country’s economy is unstable, the chances are high, that investment will fail to survive if invested in the long run.
Also, if the country’s contact isn’t good with others, it may lead to a fall in its stock’s value.
Asset valuations turn out to be a vital point of any investment decision if you’re following the Top Down investment strategy.
It also considers the market growth of a country. For instance, if a country is growing fast, it’ll become a breeding ground for many profitable companies.
Hence, daily, you may see a big hike in their asset prices. That’s why this step becomes critical to consider.
Disclosure and Financial Reporting
It’s one of the most important points that must be taken into account to analyze the emerging markets. Sometimes, growing industries in another country’s market can come up with significant risk.
This is due to the financial disclosure that can be misleading. These can be domestic companies with no federal protection, which raises concern for the investor.
A country’s currency can’t be ignored because it’s also a major part of the macro-economy. Currency rates can rise and fall over time.
Hence, those industries that rely on foreign currency or most of their operations use foreign currencies can incur a loss.
It’s mainly due to the added factors, such as if a recent storm has scattered the country’s economy, the currency value may fall. Political situations also influence the currency value.
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Benefits of Top Down Investing
An investor makes a well-informed decision by taking the various macro-economic factors into account in this strategy. It also prevents investors from over-investing.
For instance, where a big investment isn’t gainful, the Top Down investing strategy alerts you before. It also helps investors get an idea about when the market is likely to decline or rise.
Hence, if an investor realizes that the potential of losing money is high, he/she can resist putting money.
An investor can also employ a diversification strategy and derive profitable results if they work upon this principle.
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Drawbacks of Top Down Investment Approach
Few misleading data can prevent investors from earning huge. The strategy doesn’t pay any attention to the company’s performance.
After extensive efforts and research, an investor can incur a loss because they haven’t considered taking an overview of the company’s performance.
It is possible that the company is under financial burden or liabilities ratio is high. All these things create a risky condition for an investor, and they come to know about it after they incur a big loss.
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Top Down Investing – Conclusion
The overall review of the Top Down investing strategy signifies that it’s a quite effective approach for investors.
Mainly, those investors who deal in the global financial market can get more out of their hopes using this strategy.
One can only use this strategy if they are well familiar with the nature of the macro-economic factors.
Though, the strategy also comes with a few drawbacks. It often forces you to decide based on half-done data since the market is full of twists and turns.
Within a second, you can see a big shift in the market value. So solely relying on this strategy isn’t worth it.
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