The Pros and Cons of Top-Down Investing

Top-down investing is a type of investment in which an investor takes a broad approach to selecting a sector to invest in and then chooses the best companies in that particular industry to invest in. The investor will look at the financial health of the world, zero in on financially sound regions, and then determine the best sectors in the market to invest in. This is a strategy in contrast to trying to identify individual companies that appear to be moving in the right direction regardless of industry. Here are some of the pros and cons of using top-down investing.

Pros

Using a top-down investment approach requires the investor to do a great deal of research on country economies as well as the sectors that make up those economies. By doing this, the individual will be able to determine which industries appear to be doing well. The investor will not invest in equities in a particular sector unless that sector appears to be moving upward. If few sectors are doing well, this will limit the amount of opportunities that the investor has. If the investor does not put a great deal of money into stocks when the market is about to go down, this can limit their exposure. This strategy could potentially save you a lot of money when the market declines.

Another advantage of using this strategy is that you can diversify your holdings over several sectors. In addition to that, you can diversify over multiple international markets as well. You can find the international markets that are performing the best and allocate some of your money to these markets. This will help lessen the blow if your own country's financial markets go through a downturn.

Cons

Even though this investment strategy does have some good potential, there are a few problems with it also. Perhaps the biggest problem that many people run into is that they do not perform their research properly. This strategy involves a great deal of individual research in order to be successful. If you do not follow through on your end of the deal, it will not reward you with good returns.

With this strategy, you are essentially trying to identify sectors that look like they could be moving upward. Then you invest in the top companies in that field. If you happen to choose the wrong companies to invest in, the rest of the sector could move upward as you predicted, the companies that you invested in may not move up. 

Another potential drawback with top-down investing is that you may find yourself not investing much of your resources into stocks if your research tells you that a downturn is going to continue. If you were incorrect with your research and the market starts to bounce back earlier than you anticipated, you will not have enough of your portfolio in equities and you will miss out on a great deal of profits that you could of had.

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