Time for Active Management
It is increasingly obvious that we are in the end game for passive investment management. Despite the portfolio drawdowns we saw 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 taken 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 are today significantly distorting the valuations of a small group of very large companies. The growing disconnect between price and value for these issues is becoming a threat to the viability of the financial system. Your portfolio needs to be able to manage its exposure to such a threat.
[3] Here's perhaps the most important point: Psychologically, individuals can’t begin to handle difficult markets, even if those markets eventually recover. Every time we run into one of those “black swan” events that seem to occur every ten years or so, the drawdown of portfolio values far exceeds the pain tolerance of the average investor.
The dark side of passive investing is that it offers absolutely no protection against “black swans.”
Examples 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 here 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 were over 50%!
Such levels of volatility are simply intolerable to 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 often 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 stomach the volatility associated with the investment. Investor returns are seldom the same as investment returns — they are almost always much lower.
Client comfort and confidence must be the first priority of professional investment management. It seldom is. Only an active approach can make volatility and drawdown management its priority and deliver return patterns that meet the expectations of the client.
In the strong equity markets we saw through 2021, a typical active strategy might well 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 much less volatile return patterns. Active strategies deliver much higher Sharpe and Sortino Ratios (measures of risk-adjusted returns) than passive ones.
Over full-cycle holding periods, our active strategies typically deliver returns comparable to 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, the risk-adjusted returns are twice those of the passive comparison.
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, as we tend to say, is a prerequisite to success.