Should you adjust your portfolio when the UK recession ends?

21st September 2012

During the tech-boom of the 1990s the smart money was in high tech companies; even many blue-chip technology companies posted extraordinary gains during that decade.  For example, Vodafone gained 1,000% in just over three years between 1996 and 2000.

If you were fast enough, a switch to boring "old economy" bricks and mortar companies in 1999 would have been a great idea.  Many of them performed fantastically well during the dot-com bust of the early 2000s.

There are two schools of thought on this question of how to pick stocks and how to manage a portfolio in order to benefit from changing economic conditions.

Top-down investing

The first school is known as top-down investing.  This school says that it is possible to spot attractive opportunities by looking at the economy, industrial cycles, emerging trends and other factors, and then to build up a picture of what is likely to do well in the next year or more.

In my opinion, top-down investing is hard – I mean really hard.  You'd probably have to factor in (at least):

Each one of those factors contains hundreds, if not thousands of sub-factors that may need to be considered.

Despite the difficulties, top-down investing just feels right for most investors.  It's a natural way for intelligent people to think about their investments because it's similar to how we deal with many other things in life.

But I still don't like it.  I think most private investors would do well to consider the second school.

Bottom-up investing

Continue reading…


More on Value Investing:

Q&A – Finding value in uncertain markets

Sticking to the basics of value investing outperforms over time

5 things you should know before you buy BT shares

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