The top-down approach is a method used to analyze and choose securities. It involves looking at the bigger picture first (as in the whole economy), before looking at the specific company itself.
An individual that uses the top-down approach will typically start by looking at how an asset class is likely to fare within the short-term world economic, political and social environment.
When undertaking the ‘big picture’ analysis of the economy, investors using the top-down approach will consider variables such as employment rates, GDP and inflation rates.
Top-down investors focus on the economic cycle to arrive at investment decisions. They will usually pick suitable investments for the phase of the cycle, before picking specific stocks, bonds etc.
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