Data mining and predictive analytics
Investment analysis is a broad term for many different methods of evaluating investments, industry sectors, and economic trends. It can include charting past returns to predict future performance, selecting the type of investment that best suits an investor's needs, or evaluating individual securities such as stocks and bonds to determine their risks, yield potential, or price movements. Investment analysis is key to a sound portfolio management strategy.
The aim of investment analysis is to determine how an investment is likely to perform and how suitable it is for a particular investor. Key factors in investment analysis include the appropriate entry price, the expected time horizon for holding an investment, and the role the investment will play in the portfolio as a whole.
In conducting an investment analysis of a mutual fund, for example, an investor looks at how the fund performed over time compared to its benchmark and to its main competitors. Peer fund comparison includes investigating the differences in performance, expense ratios, management stability, sector weighting, investment style, and asset allocation.
In investing, one size does not fit all. Just as there are many different types of investors with unique goals, time horizons, and incomes, there are investment opportunities that match those individual parameters.
Investment analysis can also involve evaluating an overall investment strategy in terms of the thought process that went into making it, the person's needs and financial situation at the time, how the portfolio performed, and whether it's time for a correction or adjustment. Investors who are not comfortable doing investment analysis on their own can seek advice from an investment advisor or another financial professional.
While there are countless ways to analyze securities, sectors, and markets, investment analysis can be divided into several basic approaches. When making investment decisions, investors can use a bottom-up investment analysis approach or a top-down approach. Bottom-up investment analysis entails analyzing individual stocks for their merits, such as their valuation, management competence, pricing power, and other unique characteristics.
Bottom-up investment analysis does not focus on economic cycles or market cycles. Instead, it aims to find the best companies and stocks regardless of the overarching trends. In essence, bottom-up investing takes a microeconomic approach to investing rather than a macroeconomic or global approach. The global approach is a hallmark of top-down investment analysis. It starts with an analysis of economic, market, and industry trends before zeroing in on the investments that will benefit from those trends.
In a top-down approach, an investor might evaluate various sectors and conclude that financials will likely perform better than industrials. As a result, the investor decides the investment portfolio will be overweight financials and underweight industrials.
Then it's time to find the best stocks in the financial sector. In contrast, the bottom-up investor may have found that an industrial company made for a compelling investment and allocated a significant amount of capital to it even though the outlook for the broader industry was relatively negative. The investor has concluded that the stock will outperform its industry. Other investment analysis methods include fundamental analysis and technical analysis.
The fundamental analyst stresses the financial health of companies as well as the broader economic outlook. Practitioners of fundamental analysis seek stocks they believe the market has mispriced. That is, they are trading at a price lower than is warranted by their intrinsic value. Often using bottom-up analysis, these investors will evaluate a company's financial soundness, future business prospects, and dividend potential to determine whether it will make a satisfactory investment.
Proponents of this style include Warren Buffett and his mentor, Benjamin Graham. The technical analyst evaluates patterns of stock prices and statistical parameters, using computer-calculated charts and graphs. Day traders make frequent use of technical analysis in devising their strategies and timing their buying and selling activity.
Research analysts frequently release investment analysis reports on individual securities, asset classes, and market sectors, with a recommendation to buy, sell, or hold them.
For example, on Feb. The report takes a macroeconomic approach, looking at various positive and negative political and economic developments that could influence the sector. It looks at retailer cost-cutting efforts on the upside and the potential impact of ongoing trade disputes on the downside. It suggests that prices in the sector have already been driven up substantially by investors seeking the safe haven that this sector has always represented. The analysts then assigned an overall neutral assessment rating of "market perform.
Key Takeaways Investment analysis involves researching and evaluating a security or an industry to predict its future performance and determine its suitability to a specific investor. Investment analysis may also involve evaluating or creating an overall financial strategy.
Types of investment analysis include bottom-up, top-down, fundamental, and technical. Proponents of bottom-up analysis include Warren Buffett and his mentor, Benjamin Graham.
Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Related Terms Bottom-Up Investing Definition Bottom-up investing is an investment approach that focuses on the analysis of individual stocks and de-emphasizes the significance of macroeconomic cycles. Sector Analysis Sector analysis helps investors assess the economic and financial prospects of a sector of the economy to identify potentially profitable investments.
Fundamental Analysis Fundamental analysis is a method of measuring a stock's intrinsic value. Analysts who follow this method seek out companies priced below their real worth. Technical Analysis Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume.
Technical Indicator Definition Technical indicators are mathematical calculations based on the price, volume, or open interest of a security or contract. Financial Analysis Definition Financial analysis is the process of assessing specific entities to determine their suitability for investment. Partner Links.
Related Articles. Investing What Are Stock Fundamentals? Fundamental Analysis Is it better to use fundamental analysis, technical analysis, or quantitative analysis to evaluate long-term investments? Investopedia is part of the Dotdash publishing family.
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Many new investors are eager to start building their portfolio, but what they may not realize is how important regular portfolio analysis will be to their success. It's harder to save and invest profitably if you aren't prudently overseeing your money.
Analyzing your portfolio improves the odds of having enough growth to harvest the financial rewards you need. What's more, portfolio analysis can seem daunting until you get the hang of capital allocation. This basic introduction will better prepare you for the task of assessing your portfolio's health or, if you outsource that job to a professional, understanding what questions to ask about your investments.
Portfolio analysis is the process of studying an investment portfolio to determine its appropriateness for a given investor's needs, preferences, and resources. It also evaluates the probability of meeting the goals and objectives of a given investment mandate , particularly on a risk-adjusted basis and in light of historical asset class performance, inflation, and other factors. To analyze a portfolio requires knowledge of the different types of assets and their characteristics.
The advisory firm would want to avoid any significant allocation to stocks, due to their volatility, and instead emphasize readily-liquid and less volatile options such as cash, money market funds , certificates of deposit CDs , U.
Treasury bills and notes, and other similar investments. For her portfolio, the primary goal is to ensure the principal is there when the investor needs to access it and that the capital does not sustain any losses. The goal of your portfolio will be specific to your situation, and therefore an analysis will change accordingly.
To analyze a portfolio, it helps to break the process down into three steps. First, examine the portfolio as a whole. In the case of an all-equity portfolio, this might mean looking at the total number of portfolio components, the price-to-earnings ratio of the portfolio as a whole, the dividend yield of the portfolio as a whole, and the expected growth rate in look-through earnings per share.
The second step is to examine the portfolio components in relation to each other. The goal during this step is to understand how each holding within a portfolio is influenced, directly or indirectly, by the others as well as by other factors that influence each asset separately. A decline in oil prices had resulted in income losses among the communities where a large percentage of its restaurants were located, resulting in the firm's closing of dozens of restaurants, mostly in Texas.
Any investor who held an equity stake in that franchisee operator would have increased his or her risks substantially by holding shares of the largest oil companies so-called oil majors. Even though gasoline, jet fuel, crude oil, and natural gas don't seem to have a lot in common with ice cream cones and hot dogs, they were correlated in this case due to the geographic location of the franchised restaurants.
These franchises depended upon local customers who drew their paychecks from the oil companies; therefore when oil did badly, those Dairy Queens did, too.
Your third task is to examine the portfolio components as stand-alone investments. As you analyze each position, ask yourself:. This can prevent a lot of folly from making its way onto your balance sheet. Upon conducting a portfolio analysis review for a client, a financial advisor might discover that the investor's predetermined asset allocation included a low-cost bond exchange-traded fund ETF.
The problem here is that, after digging into the filings of the ETF, the advisor discovered that some of the bonds held by the fund were high-risk junk bonds representing loans to third-world countries. In such a case, it would be less risky to earn a bit less money by holding investment-grade corporate bonds , rather than invest your precious capital halfway around the world into the debt securities of a nation that has a real chance of not being able to pay its bills. While these three steps are likely enough for most individual investors, institutional investors can perform several other portfolio analysis processes when evaluating assets under management.
For example, many portfolio managers prefer to do back-dated stress testing to see how a given portfolio might have been likely to perform under different economic or market conditions.
They may simulate a recurrence of the Great Depression, the stock market crash of , the Asian financial crisis, or the Great Recession that began in December of Another possibility is to have them automated according to a schedule by the portfolio manager or the investment committee of an asset management company.
The same is true of a trustee of a trust fund , who should regularly ensure that a trust's assets and transactions, including any distributions or payments, are in harmony with the trust instrument. The Balance does not provide tax, investment, or financial services and advice. Past performance is not indicative of future results.
Read The Balance's editorial policies. Why do I own this? What do I expect the after-tax cash flows to be, relative to the price I paid? On what terms do I continue to hold the stake?