Time for Active Management
It has become increasingly obvious that we are in the end game for passive investment management. Despite the portfolio drawdowns we experienced in 2022, and more recently here in 2025, buy and hold, portfolio management continues to be the overwhelming choice of investors, their advisers, financial academics, and the Wall Street giants. This idea has been hard-wired into the system. After all, it has worked for forty-five years.
As you might have anticipated, we've take the other side of the debate for many years — we believe that active management is critical to your financial health and, perhaps, even to your financial survival.
Here are some of the major issues with passive investment management:
[1] 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. You simply can’t bet your financial security on the idea that the future will look just like the past — no one should expect that investing in stocks will continue to provide positive returns with low volatility, as it has for several recent decades.
[2] The mechanical implementation of passive strategies has created poorly understood feedback loops that have significantly distorted the valuations of a small group of very large companies. The resulting disconnect between price and value for these issues is becoming a threat to the financial system. Your portfolio needs to be able to manage exposure to such a threat.
[3] Here's 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 those “black swan” events that seem to occur every ten years or so (and may be underway as we speak), the drawdown of portfolio values far exceeds the pain tolerance of the average investor.
The dark side of passive portfolios is that they offer absolutely no protection against “black swans.”
This was the case as recently as 2020, when 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 it can get worse: in the major bear market events of 2001-03 or 2007-09, the eventual drawdowns were over 50%!
That level of volatility is intolerable for normal human beings, especially when it affects their core 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 usually take matters into their own hands, typically liquidating stock portfolios with terrible timing.
As a result, those widely advertised multi-decade “buy-and-hold” return statistics we see all the time are seldom achieved by anyone in the real world, because most investors just can’t sit through that much volatility. Investor returns are seldom the same as investment returns. They are almost always much lower.
As a result, client comfort and confidence should be the first priority of professional investment management. It seldom is. Only an active approach can make volatility and drawdown management its priority and target a return pattern that can meet the expectations of the client.
In the strong equity markets we saw through 2021, a typical active strategy might well have delivered lower returns than a passive one. But, in a more challenging environment, the active portfolio is likely to deliver measurably smaller losses and much less volatile return patterns. That was our experience in 2022 for example.
Lower volatility and smaller drawdowns is the combination that gives the investor a chance to stay in the game — to experience the benefit of full-cycle, long-term returns.
Over full-cycle holding periods, active strategies can deliver long-term returns comparable to passive index investments, but not always at the same time. More important for the ultimate success of the client, the active portfolio is likely to deliver significantly higher risk-adjusted returns (measured by Sharpe or Sortino ratios), reflecting the significant reduction of negative volatility.
Those 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, as we tend to say, is a prerequisite to success.