Every Wednesday in 2016, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a beginner or an experienced investor, they are designed to give you specific tips on investing in stocks. Each gives you a fundamental piece of investment advice, and shows you how you can put it into practice right away.

Investment tip: “Among other advantages, bottom-up investing has one big advantage over top-down investing: it doesn’t force investors to rely on predictions of what might happen next.”

In the early chapters of any good book on fundamental stock market advice, you will come across the two basic ways to make investment decisions: bottom-up and top-down.

Using the bottom-up approach, you focus on understanding what’s going on, rather than trying to predict what happens next. You could call this descriptive finance. You delve into earnings, dividends, sales, balance sheet structure, competitive advantages and so on.

From there, it quickly becomes obvious that there’s an awful lot you don’t know about the risks associated with the investments you’re considering. So you try to design a portfolio in which the risks offset each other.

Using the top-down approach (which you might call predictive finance), you downplay what’s going on now and try to figure out what happens next. You may zero in on trends in stock prices, the economy, interest rates, gold and so on. You may disregard most details. Or, you may focus on a single key trend, event or detail, such as the Y2K scare that gripped the world in late 1999, the Internet stock boom, avian flu, or the future of the electric car.

In any one year, top investment honours often go to a top-down advisor. When enough people offer opinions about the future, after all, somebody has to get it right. But nobody gets it right every time. Anybody who did would eventually acquire a measurable share of all the money in the world, and nobody ever does that.

That’s why there’s a lot of turnover in the top ranks of top-down investors. One bad guess can ruin a previously enviable record.

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Stock market advice: Why gains accumulate for bottom-uppers

Over periods of five years and beyond, however, top investment honours mostly go to a member of the bottom-up crowd. That’s partly because bottom-uppers tend to make fewer big mistakes. This lets their gains accumulate. This also leads to longer holding periods, which provide greater tax deferral and lower brokerage costs.

The top-down approach appeals to beginning investors, when they have not yet learned how little they know. (That’s a good time for it, when you have little money to invest and can’t do yourself much harm.) By the time they build up enough of a stake to begin serious investing, most advisors and investors have settled on a mix of top-down and bottom-up. As years pass, successful investors tend to put more weight on bottom-up. They like the way it cuts risk.

Sometimes, a top-down idea acquires way too much influence on way too many investors. A classic example is the intense interest over Greece’s debt crisis and a possible eurozone economic collapse, if not a worldwide collapse. Week after week, in almost every newspaper or online news source you could find one or more articles delving into how that might occur, and the devastating financial results that would follow.

This widespread attention tends to get priced into the market, as traders say. In other words, investors react to this kind of potential calamity by paying a little less for investments than they otherwise would. As a result, you can buy good investments for less money.

European authorities have crept tentatively, and often nervously, towards a final resolution of the fiscal predicament in Greece. As they have done, the markets have adjusted and even moved up.

To put it another way, if the risk of another European debt crisis—or another government shutdown in the U.S., or ongoing unrest in the Middle East—tempts you to sell all your stocks and go into cash (as traders say), keep one thing in mind: you’re not the only person who knows about that risk.

COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members

Have you reacted to a major crisis by selling off stocks and going into cash? Was that a good decision, or did you regret it? Alternately, have you ever treated a crisis as a buying opportunity when stocks were temporarily down? How did that work out?

Note: This article was originally published in 2012 and was last updated on Juky 24, 2016.