Investment Systems Can Do Almost Anything. But Not Everything.

May 30, 2025

The essence of strategy is choosing what not to do.

—Michael Porter

One of the biggest misconceptions in investing is that the best system is the one that does everything. In reality, the strongest systems are those that do a few things well — and intentionally avoid the rest.

At Blueprint Investment Partners, we believe the art of system design lies not in complexity, but in clarity and robustness. That means focusing on what works across a variety of market environments, not just what works in backtests or ideal conditions. It also means making tough decisions about what to prioritize — and being honest about the tradeoffs. Responsiveness might improve timing but increase taxes. Broader exposure might boost diversification but dilute conviction. There’s no free lunch.

Like all investment strategies, trend following comes with tradeoffs. But unlike many approaches that try to mask them, it brings those tradeoffs to the surface — where they can be understood, managed, and ultimately turned into strengths.

In this month’s Co-Founders’ Note, we explore how trend following, like life, requires choices. We also share how the current environment continues to highlight the importance of staying focused on what works — rather than trying to be everything at every time to everyone.

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

Asset-Level Overview: Market Talking Points for Financial Advisors

Equities & Real Estate

After early April’s historically sharp decline, May picked up where the prior month ended with U.S. stocks quickly making up ground after tariff uncertainty abated briefly. Since the torrid start to May, things have settled a bit, but enough recovery occurred to flip negative trends back to positive. As a result our portfolios will increase their exposure to U.S. equities. Further, the continued weakness of other equity segments, such as real estate, will result in their allocations being moved to U.S. equities, which will push the asset class into overweight status for strategies focused primarily on capital appreciation.

International stocks also performed positively alongside their U.S. counterparts in May. Trends in foreign developed equities remain stronger than those in emerging markets, resulting in a continued tilt toward developed. The aggregate allocation to international equities will be at its baseline.

As mentioned above, real estate securities continue to be weak. In fact, trends over all timeframes we monitor remain negative. The consequence is that this allocation will be handed off to stronger U.S. equities in strategies focused on capital appreciation and to fixed income for strategies focused on preservation.

Our Asset Allocations

Fixed Income & Alts

The fixed income picture remains cloudy, with prices generally falling in May. Trends weakened in the middle of the yield curve — after showing strength in April — and our portfolios will reallocate toward shorter-duration instruments. International and inflation-indexed bonds remain a bright spot from a trend perspective and will continue to be at baseline allocation in some strategies and overweight in others.

Within the alternatives allocation, fixed income remains a leading exposure, now dominated by shorter-duration instruments due to trends in the middle of the curve weakening in May. Longer-duration bonds continue to be primarily held in short positions. Commodities — continuing to be led by cocoa and gold — maintain a net long posture. The portfolio remains net long the U.S. Dollar, though that exposure has lightened modestly in response to recent signs of near-term weakness. Equities are now clearly net long, as recent strength in global stocks prompted exits from short positions while long exposures were maintained.

Our Asset Allocations

3 Potential Catalysts for Trend Changes: Giving Clients the Context

Student Loans Re-Engage: Borrowers have been required to repay their student loans since last fall, but this month the President Donald Trump administration began putting millions of defaulted student loan borrowers into collections and threatened to confiscate their wages, tax refunds, and federal benefits. Economists at Morgan Stanley estimated that payments this year could rise by a collective $1-3 billion per month. They estimate that it could trim 2025 gross domestic product by about 0.1% from consumer spending. This month, the Federal Reserve Bank of New York also reported that the student loan delinquency rate jumped from 0.7% in the Q4’24 to 8% in Q1’25, which is back to around where it was before the pandemic.

Slowing Home Sales: Mortgage rates have climbed to 6.86%, the highest level in three months, after holding steady between 6% and 7% for most of the past year. Pending home sales have fallen in all four U.S. regions, with the West seeing the largest drop, then the South. The pending home sales index, which is a leading indicator of sales based on contract signings, fell 6.3% in April; this offsets the 5.5% rise in March. Nationally, there were 1.45 million homes for sale or under contract at the end of April, which was up 9% from March and up 20.8% from April 2024.

Tariff Timeout: The New York-based Court of International Trade has ruled that President Donald Trump overstepped his authority to impose sweeping tariffs on all U.S. trade partners. This ruling invalidates the tariffs that were established on April 2. Trade experts argue that the global trade war is far from over. While a setback for Trump, the court’s ruling is unlikely to deter him from seeking to reestablish the tariffs under a different authority. The administration has appealed the decision; however, the court is unlikely to stay its own decision. The appeal could ultimately end up in the Supreme Court. Trade experts and lawyers said the administration has other legal avenues to prosecute the trade war uninhibited by the Court of International Trade’s decision.

Sourcing for this section: The Wall Street Journal, “How Student-Loan Crisis Will Show Upin the Economy,” 5/26/2025; The Wall Street Journal, “First-Time Home Buyers Downsize Amid Tight Supply, High Interest Rates,” 5/23/2025; The Wall Street Journal, “Pending Home Sales Slump as Mortgage Prices Weigh,” 5/29/2025; The Wall Street Journal, “Home Sales in April Fell for the Second Straight Month,” 5/22/2025; and The Wall Street Journal, “Tariff Ruling Is a Setback for Trump but Doesn’t End Trade War,” 5/29/2025

Don’t Let the Pursuit of Perfection Be an Obstacle to Greatness

You can do anything, but not everything.

—David Allen

Over the years, we have heard various forms of the highlighted quote from David Allen, the author of “Getting Things Done.” No matter how it is said or in which context, it remains one of our favorites because of applicability to the art and science of system design broadly and trend following specifically. In other words, one can design an investment system that can do almost anything, but not everything.

In this way, investing imitates life. If one pours their energy into any one endeavor to the exclusion of all others, there is a reasonably high likelihood they will achieve it. However, this approach means it is less likely the person will master other skills, especially as the standard or playing field increases in its complexity. That’s the tradeoff.

Take for example sports, where it is common in high school and even some levels of collegiate athletics that players will excel in multiple arenas. As one moves up in competition, however, it is far less likely that this will occur. It’s the reason you don’t see many Olympic triple jumpers that are also on the basketball team even though they broadly may have some overlapping skills. At some point, one must choose what is most important to finetune techniques accordingly.

Investing Tradeoffs: From Responsiveness to Taxes

What is fascinating about the financial markets and investing is that, many times, focusing on one aspect or benefit brings a diametrically opposing consequence. To illustrate this point, consider the impact of having very responsive systems and the ensuing result in terms of taxes. At a high level, as trading decisions are executed more frequently, whether systematically or discretionarily, the odds of short-term gains increases, making the final result less tax efficient. So, an investor may get the desired outcome of exiting before declines more often, or participating in the earlier stages of increases, but the tradeoff is an after-tax return that is inferior to a less-responsive system.

Some investors may eschew tactical asset management altogether, favoring passive investing strategies that are on average more likely to be invested in stocks. This can work great for long periods, until a financial crisis causes a drawdown large enough to have them crying uncle. Without a tested plan for re-entering markets, the exact rally they intended to never miss may pass them over. This is a major takeaway from the annual DALBAR Quantitative Analysis of Investor Behavior (QAIB) report.

Reducing the Side Effects of Investing

In our opinion, one of the most important strengths of good systematic asset managers is not a hard skill like coding but rather the soft skill of having enough humility to realize we cannot solve for every scenario. While we are always on the hunt for ways to reduce or even eliminate the side effects of trend following, our primary focus is on tuning the strengths and minimizing the weaknesses in a way that can help financial advisors manage their clients and even their practices.

The recent market conditions are a prime example of this principle. Capturing the relatively smooth U.S. equity trends of late 2023 and 2024 in a tax-efficient manner required rules that ignored small blips and tilted exposure away from weaker real estate and international equities. If you wanted to immediately capture the sudden reversal toward international strength in December 2024 and January 2025, it would have likely meant inferior performance in the preceding period, both on a before- and after-tax basis.

Some clients don’t like to hear there are constraints and tradeoffs. They want to believe that for a 1% fee, a financial advisor can wave a magic wand and always beat “the market” (whatever their definition of “the market” may be). Like you, we wish it was that easy.

In fact, another excellent example of the maddening investing tradeoffs that exist is that some of the best systems for performance over 1 to 5 years are terrible for 30- to 40-year performance. So, even though most clients should be focused on the latter they tend to make decisions on the former. This is what makes the job of a financial advisor so difficult.

At Blueprint Investment Partners, we want to provide the investment foundation and complementary tools and services to help financial advisors coach their clients toward the desired outcome. We also want to help your clients enjoy the best of both worlds in terms of participating in prolonged rallies while avoiding the worst of protracted declines. It is not perfect, but nothing is.

In our view, investing is not about perfection. Rather, it’s about not letting the pursuit of perfection get in the way of greatness.