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Series 65 Exam Tutor

Top Down Versus Bottom Up Investing

Top Down (In order of priority)


Economic factors ( gets the highest priority)


Sector allocations versus a benchmark


Individual stock evaluation


With top down investing, the economic factors drives the process. In the real world, the expected direction of interest rates is the most important factor to consider. Rates can either go up or down. If rates are expected to fall, you should get more aggressive with bonds and stocks. Falling rates is directly good for bonds and is also good for stocks. On the bond side, you should increase the duration of the bonds by buying longer term bonds with lower nominal yields. On the stock side, you can buy high beta stocks. It is not a terrible idea to buy interest rate sensitive stocks but these stocks do not usually have high betas. If rates are expected to rise, you should get more defensive.


Bottom Up (In order of priority)


Individual stock evaluation ( fundamental analysis drives the process)


Sector allocations versus a benchmark


Economic factors


Most equity mutual fund managers want to be recognized as a bottom up stock picker. When I worked as an mutual fund investment analyst, one manager I followed did not like to discuss sector allocations and refused to discuss the economy.

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