Time for Active Management
We're approaching the end game for passive investment management.
Simply buying and holding the investments in their retirement portfolio has become the overwhelming choice for most investors, encouraged by their advisers, financial academics, and the Wall Street giants.
The portfolio drawdowns we saw in 2022, and more recently in 2025 and early 2026, might have served as reminders of the inherent volatility of equities, yet passive approaches to managing equity portfolios continue to gain market share. They've become hard-wired into the system.
As you might have anticipated, we take the other side of this debate — we believe that active investment management will be critical to your financial health and, perhaps, your financial survival.
Here are some of the major issues with passive investment management:
[1] We stand at one of the most overvalued stock market extremes of the past 100 years. Doesn't mean that equities will crash next month, but it does suggest that the next ten years are highly unlikely to be like the last ten.
That proposition seems much less controversial today than it did five years ago. Today's passive portfolio index strategies simply bet your retirement savings on the idea that the future will look like the past.
Most likely, it will not.
[2] Beyond overvaluation, the mechanical implementation of passive strategies has created poorly understood feedback loops that are today significantly distorting the valuations of the very largest companies. The growing disconnect between price and value for these issues is becoming a threat to the proper functioning of the financial system.
Your portfolio needs to be aware of, and monitor its exposure to this threat.
[3] Finally, perhaps the most important point: psychologically, individuals can’t begin to handle difficult markets, even when those markets eventually recover. Every time we run into one of the “black swan” events that seem to occur once or twice a decade, the drawdown of portfolio values far exceeds the pain tolerance of the average investor.
Passive investing offers absolutely no protection against “black swans” events.
Examples of uncomfortable drawdowns abound: In 2020, the S&P 500 saw a top-to-bottom decline of 34% in just five weeks in the so-called “Covid Crash.” Then in 2022, the Nasdaq Composite was down 36% at its low in mid-October. And in 2025, we saw drawdowns of 19% and 23% respectively for the S&P 500 and the Nasdaq 100.
As we all kow, it can get much worse: in the major bear market events of 2001-03 or 2007-09, the eventual drawdowns for the S&P were over 50%. Such levels of volatility are simply intolerable for normal human beings, especially when they reflect what is happening to their core savings capital.
Over many decades of managing money for individual clients, we’ve learned that their threshold of pain is closer to a drawdown (temporary loss) of 10% or 15%, not 30%, let alone 50%. Whenever investors experience that much financial pain, they typically take matters into their own hands, often liquidating stock portfolios with terrible timing.
As a result, those multi-decade “buy-and-hold” return statistics we see advertised all the time are seldom achieved by anyone in the real world, because most investors just can’t survive the volatility associated with the investment. Investor returns are seldom the same as investment returns — they are almost always much lower.
Only an active approach can prioritize the management of volatility and drawdown and focus on generating return patterns that meet the expectations of the client. Client comfort and confidence should be the first priority of professional investment management. It seldom is.
In the strong equity markets we saw through 2021, a typical active strategy might have delivered somewhat lower returns than a passive one. But, in a more challenging environment, say 2022, the active portfolio delivered measurably smaller losses and a much less volatile return patterns. Active strategies almost always deliver higher Sharpe and Sortino Ratios (measures of risk-adjusted returns) than passive ones.
Over full-cycle holding periods, our active strategies usually deliver returns comparable to those of passive index investments, but not always at the same time. More important to the ultimate success of the client, the active portfolio is likely to deliver much higher risk-adjusted returns (measured by Sharpe and Sortino ratios), reflecting the significant reduction of negative volatility. For several of our strategies, risk-adjusted returns are twice those of the passive benchmark.
Those higher Sharpe or Sortino ratios are highly relevant proxies for client comfort and client tenure. They improve the likelihood that clients will actually make it to their financial finish line. Survival, we say, is a prerequisite to success.