Investment style is critical to how a mutual fund manager handles your money. Assets are selected using several different methods, and it’s important to know whether your manager’s style fits your risk-reward profile. “Both risk and return are connected to style,” says Chris Geczy, director of The Wharton School’s wealth management program at the University of Pennsylvania. “According to current practice portfolio theory, you can optimize a blend of styles for diversification, balancing reward and risk.” Given how the market operates, investing style is paramount. Here are six of the most common investing strategies that a financial manager uses.

Top-down Investing

A mutual fund manager using the top-down investment strategy chooses assets by looking at the market from a wide perspective. When the economy is about to take a dive, a manager employing this strategy may, for instance, opt to sell in affected areas while buying in risk-averse defensive industries such as food and beverage, or healthcare. On the other hand, if the economy is doing well overall, the tendency is to buy throughout the market, and industrial and high technology in particular (which often both perform exceptionally well in an upward market).

Bottom-up Investing

Bottom-up managers examine the market on the micro-level, analyzing the strengths and weaknesses of an individual company without regard for that company’s sector or the market as a whole. This strategy relies heavily on researching a company exhaustively. No amount of research, however, is impervious to the effects of a major market-wide downturn.

Fundamental Analysis

Fundamental analysis looks at a company from all angles in order to determine what exactly drives growth. Meeting with CEOs, suppliers, customers, as well as the competition, could make up one part of this strategy. Evaluating all aspects of a company’s financial information is another. A thorough understanding of a company’s total anatomy and its driving forces is crucial to fundamental analysis.

Technical Analysis

Technical analysis extrapolates the viability of an investment by looking at past trading data. One school of thought contends that an asset’s price at any given moment gives most of what needs to be known about that particular asset.

Most managers use a combination of both fundamental and technical analysis. “If a stock has good fundamentals, it should be stable to rising. If it’s not rising, the market is telling you you’re wrong or you should be focusing on something else,”says Mick Heyman, an independent financial adviser in San Diego. 

Contrarian Investing

As the name suggests, the contrarian investment strategy chooses assets in the market that are not necessarily popular, in the hopes of buying undervalued stocks and selling high. Betting against market consensus involves more risk, but the rewards can be higher. .

“The contrarian style generally rewards investors, but you have to choose the right assets at the right time,” says Geczy.

Dividend Investing

Dividend investing, as opposed to contrarian investing, seeks out assets with a proven track record for growth, and is a particularly popular strategy when the economy is in a slump overall. The chances of these investments giving a return are much higher, even when the price is down.

Their current popularity, however, has prompted some economists to propose that they’re overvalued. Further, coming across very high yields can sometimes be an indicator that a company is taking too-heavy risks and leaving themselves vulnerable to a crash.

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