Humans just don’t naturally trust simplicity, and sometimes that’s for good reason in the investing world. Again, a buy-and-hold strategy is technically simple. Really most passive approaches are. But, remember that example I mentioned earlier of a near-retiree who can’t handle a catastrophic loss in her portfolio? For that client, she needs simple and effective, and across dynamic market environments. That’s trend following.
Hortz: How do think these cognitive roadblocks for advisors can be addressed?
Robinson: I don’t mean to sound like a robot, but the more you can remove human emotion from decision making, the better. So, the answer to your question is data, research and information.
Blueprint is truly data centric, not just in how we manage our portfolios—buying and selling based on price data—but in all facets of our business. We’ve conducted extensive research to help advisors objectively weigh the merits of trend following. And, we have published several research papers to share our findings. Our latest is an analysis of whether liquid alts achieve the goal of diversification.
We seek to be a resource to advisors who want to learn more about trend following and how to best utilize these strategies in their portfolios, depending on the financial needs and risk tolerances of their clients. We talk with advisors about case studies that illustrate when trend following works well as a core strategy versus a tactical sleeve and/or hedged equity/risk mitigation strategy.
If you show advisors the actual data about how a trend-following system can protect capital, it can be eye opening.
Hortz: Besides a large market drop, what else are advisors worried about?
Robinson: I’m sure this won’t surprise you, but inflation is the other big topic we’re hearing about lately. Advisors are wondering how their portfolios—and their clients’ behavior—will weather an inflationary environment, considering we have had 30 years without one.
There is also some nervous energy around how a persistent inflationary environment will impact interest rates and subsequently bond yields. This is a serious concern and a topic we’ve been sounding an alarm about for years. If we find ourselves in a persistent inflationary environment, rates are likely to adjust upward, and that’s problematic for a traditional 60/40 portfolio. Simply, a 60/40 allocation contains much more risk than the typical balanced investor desires.
Earlier this year a research report evaluated the best strategies for inflationary times and found that trend-based approaches ranked as three of the top five and four of the top nine strategies for hedging inflation. Furthermore, while the trend-based strategies performed positively in non-inflationary times, the non-trend-based approaches that appeared in the top 10 only performed mediocrely.
We were not surprised by those findings because trend following is a reliable strategy for dealing with new and unforeseen events. Even the inflation we are seeing right now has plenty of new and unforeseen about it. While we are seeing it in real assets such as used car prices, real estate, energy and agriculture, financial assets like inflation-protected securities and the dollar have been fairly steady. That’s unusual. But trend following doesn’t care if that’s unusual because the strategy is built to protect the blind side by adapting to whatever is taking place.
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