A Disciplined Strategy Helps Avoid Self-Inflicted Wounds

February 28, 2025

The investor's chief problem — and even his worst enemy — is likely to be himself.

—Benjamin Graham

Great investors don’t just accumulate experience — they learn from it. Over the years, we’ve had the privilege of working with financial advisors who have navigated every kind of market environment. The best among them share a common trait: they don’t chase what’s flashy or react impulsively. They rely on time-tested processes that remove emotion from decision-making.

One of those advisors, a seasoned industry veteran, recently reminded us why systematic investing stands the test of time. After decades of observing what works and what doesn’t, his conviction in trend following isn’t based on theory — it’s based on lived experience. He has seen investors make the same mistakes over and over: chasing past winners, selling in fear, and letting short-term emotions derail long-term success.

Every year, the data confirms what professionals like him have long known: investor behavior is often the biggest drag on returns. An annual study by DALBAR quantifies this gap, showing just how much poor decision-making costs the average investor. The takeaway is clear — having a disciplined strategy isn’t just about maximizing returns, it’s about avoiding the self-inflicted wounds that erode them.

In this month’s Co-Founders’ Note, we explore why closing the behavior gap is one of the most valuable roles an advisor can play. We also highlight why systematic trend following isn’t just an investment strategy, it’s a behavioral advantage that helps investors stay the course through all market conditions.

But first, here’s a summary of our take on what transpired in the markets in February.

Asset-Level Overview: Market Talking Points for Financial Advisors

Equities & Real Estate

After making new all-time highs on February 19, the S&P 500 Index has pulled back a bit as it struggles to finish with a positive monthly return. Dividend payers have led, putting them in a top spot year-to-date as well. Small caps are the worst performing U.S. segment in February and one of the poorer performers for the year so far, with growth stocks also performing near the bottom domestically. Despite the mixed performance, all segments are looking at uptrends across all timeframes, except for small caps, which are flirting with an intermediate-term downtrend.

Just when investors had begun to give up on international equities, they began the year by leading over their U.S. counterparts. Both foreign developed and emerging markets are on track for solid returns in February, extending their lead for the year. While still trailing the U.S. in our measures of relative strength, they are now experiencing uptrends across all timeframes.

Real estate securities have quietly regained their footing after a poor close to 2024, managing to regain uptrends across all timeframes but continuing weakness relative to other equity or equity-like segments. The result is that our allocations will increase slightly but remain underweight.

Our Asset Allocations

Fixed Income & Alts

While the odds of rate cuts continue to dwindle, fixed income prices have stabilized and even made some progress toward regaining uptrends. In fact, 1- to 3-year Treasuries have generated an intermediate-term uptrend and will receive an allocation accordingly, but that is the only timeframe and segment in a rising-trend state.

In the alternatives allocation of our portfolios, the largest exposure remains tilted toward the fixed income sector. Like the non-alternative fixed income allocation, the portfolio favors long positions in short-duration government bonds. The equity sector is predominantly hedged but retains a net long position, with most of its long exposure focused in the U.S. Additionally, commodities exposure continues to hold a net long position. Currencies, particularly those pegged against the U.S. Dollar, are now a meaningful short position in the portfolio.

Our Asset Allocations

Sourcing for this section: Reuters, “S&P 500 edges to record closing high as Fed minutes parsed,” 2/19/2025

3 Potential Catalysts for Trend Changes: Giving Clients the Context

Consumer Spending Driven by Top 10% of Earners: The top 10% of earners, which are households making around $250,000 a year or more, are spending: vacations, handbags, and other luxury items. The spending is supported by big gains in stocks, real estate, and other assets. Those households now account for 49.7% of all spending, a record in data going back to 1989; 30 years ago, they accounted for about 36%. Mark Zandi, Chief Economist at Moody’s Analytics, has estimated that spending by the top 10% accounts for almost one-third of gross domestic product.

Housing Woes: Sales of new homes dropped in January. Elevated prices and persistently high mortgage rates continued to weigh on potential buyers. Sales of new single-family homes declined to 657,000, which is down 10.5% versus the prior month; compared with January 2024, sales were down 1.1%. As for existing home sales, they fell 4.9% in January.

Hiring Pessimism: Optimism about the U.S. economy and job market has not translated into tangible increases in hiring activity. Executives at Randstad, the largest employment agency by revenue, say they see a disconnect between sentiment and reality in the U.S., as businesses profess a strong job market but recruiters wait for a hiring surge. “Our clients have been dealing with inflation, high interest rates… so hiring activity has been very low; however, we see early cyclical sectors starting to improve,” Randstad CFO Jorge Vazquez said.

Sourcing for this section: The Wall Street Journal, “The U.S. Economy Depends More Than Ever on Rich People,” 2/23/2025; The Wall Street Journal, “U.S. New-Home Sales Slump at Start of 2025,” 2/26/2025; and The Wall Street Journal, “U.S. Economic Optimism Isn’t Converting Into Hiring Yet, Randstad CEO Says,” 2/12/2025

An Ode to Ira And a Refresher on DALBAR’s Research

You can observe a lot by just watching

—Yogi Berra

Over many years in this business, we have been privileged to meet some great financial advisors and, more importantly, great people. We were reminded of this after an interaction with Ira, our favorite octogenarian advisor. He has seen it all during his many years of working in both the private and public sector, and he became a champion of trend following via his partnership with Blueprint Investment Partners relatively later in life.

Ira is important to us for many reasons. Besides being one of the most kind, generous, and humble servant leaders we have ever encountered, his experience and subsequent conviction in trend following inspires tremendous confidence. Here’s a guy that has observed what works and what doesn’t. Through managing money over many booms and busts, he is unafraid to call a spade a spade and does not suffer foolish strategies. And yet, he has chosen systematic trend following.

We were recently discussing another timeless gem together: the renowned annual DALBAR Quantitative Analysis of Investor Behavior (QAIB) report. Over the years we have repeatedly referred to this important research as a justification for the benefits of having a professional financial advisor paired with systematic trend following. Ira and his team have also used it as a key piece of their marketing efforts.

As a refresher, DALBAR’s study assigns a numeric value to the shortfall between typical investor returns and the relevant indexes. It then explains why this shortfall is largely attributable to poor investor decision making. The general idea is if you did nothing and invested in the index, you would get the index return less fees. Thus, and all else equal, any return above or below the index is explained by actions taken by the investor.

A summary of the most recent analysis can be found here. For ease, we’ve excerpted key findings below:

The Average Equity Fund Investor Underperformed the Market: The Average Equity Investor earned 5.5% less than the S&P 500 in 2023, the 3rd largest investor gap in the last 10 years.

The Average Fixed Income Investor Underperformed to a Lesser Degree: The Average Fixed Income Investor earned 2.63% less than the Bloomberg Barclays Aggregate Bond Index gain.

Emotional Decisions Hurt Returns: Investors tend to sell out of investments during downturns and miss out on rebounds. The report illustrates the importance of a long-term investment strategy.

Retention Rates Increased: The Average Equity Fund Investor held onto equity funds for a longer period in 2023 compared to 2022.

We believe these findings are important for advisors and their clients to understand. They demonstrate that the goal should not necessarily be to beat the market and that financial advisors can help investors close the gap on the market, since studies show they would woefully underperform if left to their own devices. Obviously, beating a reasonable benchmark is fantastic, but that is probably unrealistic for most clients without the aid of an advisor. This knowledge should help change the framework and level set expectations.

Another big takeaway from the DALBAR study is that using strategies that can improve investor behavior are arguably the easiest way for financial advisors to provide substantial benefit to clients from an investment management perspective. In our opinion, nothing holds a candle to systematic trend following when it comes to improving behavior and helping clients stay on track. Trend following is also easy for advisors to incorporate into their practice and maintain over the long term. We believe this combination is unstoppable to building a great advisory practice.

So thanks, Ira! Not only for being a great advisor and friend to Blueprint Investment Partners, but also for the reminder of DALBAR’s research. Sometimes in the push for more and more returns it is easy to slightly lose sight of the gap we are trying to close between the goal and reality.