Investment managers have different approaches to investing money, which is commonly referred to as their management style.
Understanding these styles can help you appreciate whether an investment is right for you. You also want to make sure your selections match your risk tolerance so you have a diversified portfolio.
Top-down investment managers focus on the big picture by examining overall economic and market trends. They then look at sector and industry trends, and finally the company itself.
These managers analyze individual companies, and not necessarily the direction of the overall economy. They look for potential within a company and buy stocks to reflect their fund’s objective. They prefer to wait for the very best price on stocks.
The focus of this style is on strong earnings and revenue growth, and future growth potential. Investment managers may buy stocks at a higher cost, but they see higher potential for returns. This can present a higher risk potential.
This style focuses on potential. Investment managers use a bottom-up process to find companies that may be undervalued or out of favor. They anticipate that these companies will increase in market value.
Growth at a reasonable price (GARP)
These managers combine growth and value investing. They look for stocks at a reasonable price, but with growth potential to optimize return and minimize risk.
This style tends to encompass both growth and value stocks. The core investment style is generally representative of the overall market and has no intentional style bias.
One of these styles isn’t better than another. No one can predict the future. However, having a mix of management styles and diversified asset classes in your portfolio can reduce your overall exposure to risk.