Hard to Argue with 220 Years of Data: The Case for Trend Following

Chink in the Armor: When Traditional Portfolio Defensive Strategies Falter

The classic 60/40 stock and bond portfolio delivered roughly 7% annualized returns during the past two centuries — but it also suffered drawdowns as severe as –71%. These losses matter because large drawdowns create volatility drag: a 50% loss requires a 100% gain just to recover.

Each of the common defensive tools have their advantages, have produced periods of beneficial complementary performance, and have generated solid standalone results at times. However, each also comes with tradeoffs. For example:

1. Gold often fails to hedge major equity drawdowns
2. Put options are expensive and erode long-term returns
3. Bonds are unreliable when inflation rises or correlations shift

The Case for Trend Following

The investing discipline commonly referred to as trend following can take on many forms depending on the individual using it. At its core, we consider a true trend-following strategy to be rules-based, adaptive, and grounded in price behavior rather than prediction. Across centuries of data in this study, trend-following strategies:

1. Delivered positive returns during major crises
2. Performed well in the worst 10% of stock/bond months
3. Reduced drawdown depth and duration
4. Generated positive long-term returns, paying for their own protection

The ‘So What?’ for Financial Advisors

Advisors face the dual and often-competing challenges of producing consistent returns while also keeping clients in their seats. Each one alone is difficult, but together they can be even more dauting, particularly when their clients face an avalanche of outside influence from family, friends, and other financial professionals — all with their own agendas and mixed messages.

Even a financial advisor who is super well-connected to their client base cannot always be with every client to fend off the onslaught of bad advice or anxieties. Therefore, we believe an investment strategy that can help advisors keep clients on track is huge.

For advisors and their clients, trend following can offer:

1. Crisis alpha – historically positive returns during extended drawdowns
2. Behavioral discipline – systematic rules reduce emotional decisions
3. Diversification – low correlation to stocks and bonds
4. Long-term return potential – unlike insurance-style hedges

Trend following is not a tactical trade. As the data in this study shows, it is one of the most robust, time-tested forms of portfolio defense available to long-term investors.

Why Now: Trend Following in Today’s Market Environment

Today’s investment environment is defined by uncertainty rather than a single dominant risk. Elevated valuations, persistent inflation pressures, geopolitical instability, shifting monetary policy, and rapid technological disruption have increased the likelihood of regime changes — periods when traditional diversification can break down.

At the same time, after more than a decade of strong equity performance, punctuated by sharp but brief drawdowns, many portfolios are positioned for stability that may not materialize.

We think trend following is uniquely suited to this environment because it does not rely on forecasts, economic assumptions, or central bank credibility. Instead, it responds to what markets are actually doing and dynamically adjusts exposure as trends emerge across global asset classes. In environments where inflation may remain structurally higher, interest rates are more volatile, equity leadership is narrow, and correlations between stocks and bonds are unstable, trend following has historically provided resilience.

Trend following seeks to participate in sustained upside while historically mitigating the most damaging phases of market decline.

For financial advisors and clients alike, the question is no longer whether markets will experience stress, but how to build portfolios that are prepared when they do. Trend following represents a proactive, evidence-based response to uncertainty — one that’s grounded not in opinions, but in centuries of market behavior.