CIS Financial Planning
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Top Down Research
Once you have determined your own personal financial situation, your objectives, your risk tolerance, and your desired asset allocation, you are ready for the next step. This is an economic overview, or top down research. Macro-economic trends are the "big picture" if you will, and determine what sectors of the economy and industries will do well and which will have a downturn. The rise of the automobile was a macro economic trend that benefitted some industries and destroyed others. (Buggy whips, for example.) The rules of supply and demand must be recognized here. Today, networking is a major macro-economic trend. But there are a large number of companies all rushing into the same field. Too much supply and not enough demand means there will be more losers than winners in this trend. Many natural resources, such as oil, corn and wheat, are at or near all-time low inventory levels. Demand is rising as third world countries industrialize. This is a major macro-economic trend that will provide more winners than losers because there are so few players, and demand is rising.

The style of investing that is in vogue today says you don't need an economic overview. All you have to do is study a company's fundamentals, in a vacuum, and invest in the best run companies. This is a perfect example of not seeing the forest for the trees. Studying companies without any kind of an economic outlook leads investors into buying good companies that go nowhere. Ex: "XYZ On-Line" is the best run computer on-line service company. Because of it's good balance sheet, and recent move to the NYSE, many analysts rate it a buy. But everyday, computer owners are bombarded by free Internet access offers. This is cutting into XYZ's subscriber base and they are losing subscribers monthly. XYZ has tried to compete by stepping up its' own free offers, cutting into its' profit margins. XYZ is a company out of step with a macro-economic change within its own industry. It is unlikely it would be able to reverse the spiral downward, and they analysts that don't see the industry trend will be caught by surprise when earnings are lousy.

Many investors will say that you can't know the big picture because there are too many variables. (So they don't even try to develop a macro-economic view.) By doing this they have effectively eliminated some of the most important input into a financial plan. It's like dressing in the morning without knowing if it is summer or winter, rainy or sunny.

The items that need to go into a macro-economic overview include interest rates, inflation, the stock market, commodities, especially oil and grains, labor, politics, economic growth, debt levels, international trade, international markets, taxes and the metals markets, among others. The more information that goes into your overview, the less any single item has an influence. A solidly built economic view will insulate the investor from playing the "number of the day" game that causes some much volatility in the markets today. (Your asset allocation may be changed at this point.)

Once your economic overview is in place, the sectors of the economy and industries that will benefit from this view will become evident. (As will those that will be hurt.) According to some studies, just getting the industry right is half the battle. Ned Davis Research has shown that the worst performer in the right industry is usually better than the best performer in the wrong industry.

Now you can start looking at companies. You need to be aware of the industry leader, the up and comer and the turnaround candidate. You need to know why one company within the industry is doing well and why another is not. This is referred to as fundamental analysis, the study of individual companies. (Your asset allocation gets further refined as you determine how much should be in various sectors and how much should in various companies within the sectors.)

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