Active vs. passive: How about both?

By David Wismer

As we approach the end of 2025, it’s a good time to look back on what has been a most interesting year for the markets.

It started with many questions surrounding a new administration’s economic initiatives, the swift actions of “DOGE,” and a flurry of executive orders.

The tariff meltdown in the first quarter and early April led to one of the fastest and largest two-day drawdowns for the S&P 500 in history—and a total closing peak-to-trough drop of about 19%. The Chicago Board Options Exchange’s VIX benchmark for volatility spiked to over 45.

Yet, despite continuing geopolitical, tariff, inflation, and interest-rate uncertainty, markets rallied remarkably to get back to a year-to-date gain of nearly 17%. Strong corporate earnings, excitement around AI initiatives, increased transparency on tariffs, a largely resilient consumer, and expectations of further Federal Reserve interest-rate cuts have been drivers of that impressive—though choppy—recovery.

Market volatility remains a major concern

Proactive Advisor Magazine publishes reviews of major trends in the wealth-management industry, especially those related to managed investment accounts; the use of third-party investment managers; and viewpoints on active, risk-managed investment strategies.

These overviews are particularly relevant in an investment environment where market volatility remains a major theme. (As we have seen again in 2025, volatility often cuts both ways—to the upside and downside. Many studies have shown how the “best” and “worst” days in the market often cluster together.)

Financial advisers, of course, have to address their clients’ concerns and provide solutions. In Gallup research published in July, a majority of investors said they were still concerned about future market volatility.

And a study by The Financial Planning Association noted that many financial advisers have reevaluated their clients’ portfolio construction in 2025, saying, “Among the practitioners who have recently reevaluated the asset allocation strategy they typically recommend or implement for their clients, 69% say anticipated changes in the economy were a factor in that reevaluation, and 63% cited market volatility.”

The debate: Active vs. passive—or both?

The debate over active versus passive investing tends to resurface every year, often heating up during times of market stress or when new data on the volume of active and passive mutual funds and ETFs is released. But, as noted in previous updates, those numbers don’t tell the entire story. Passive investment vehicles are often used in the construction of active strategies.

Given the concern over the high and unpredictable volatility in 2025, I believe some research from several years ago is still relevant.

As we saw during the COVID era, when market volatility becomes top of mind, more advisers turn to actively managed strategies for their clients’ portfolios.

A study conducted by The Journal of Financial Planning and the Financial Planning Association (FPA) in 2021 concluded, “The majority of advisers (58 percent) continue to favor a blend of active and passive management, as has been the trend for the past several years. However, the 2021 results show a continued decline in a purely passive approach.”

Senior Investment Strategist Dan Hunt of Morgan Stanley offered a similar perspective in the article, “A New Take on the Active vs. Passive Investing Debate”:

“… I spend a lot of time thinking about how to construct investment portfolios—and these days, a big part of that conversation centers on the role of active and passive styles of investing, an ongoing (and sometimes quite heated!) debate in the financial industry. …

“Active strategies have tended to benefit investors more in certain investing climates, and passive strategies have tended to outperform in others. For example, when the market is volatile or the economy is weakening, active managers may outperform more often than when it is not. Conversely, when specific securities within the market are moving in unison or equity valuations are more uniform, passive strategies may be the better way to go. Depending on the opportunity in different sectors of the capital markets, investors may be able to benefit from mixing both passive and active strategies—the best of both worlds, if you will—in a way that leverages these insights. …”

An article in 2024 from Russell Investments provides a related viewpoint:

“Just as a GPS navigator supplemented with a map provides both real-time guidance and a reliable backup, investors may benefit from the dynamic decision-making of active management alongside the potential stability of passive strategies. …

“Just as a GPS navigator analyzes real-time data to recalibrate routes efficiently, active management interprets market conditions to steer portfolios towards investment goals. Meanwhile, passive management, akin to a map, provides a predetermined route based on market indices, offering stability and a reliable foundation.”

The bottom line

In general, financial advisers we have interviewed for Proactive Advisor Magazine tell us that third-party money management—with a focus on risk-managed portfolios—has provided the following benefits for their practice and their clients: 

•  Enhanced risk management and diversification 

•  Mitigation of market volatility 

•  Sophisticated, rules-based strategies that take emotion out of the investment equation 

•  A turnkey approach to strategy implementation and execution 

•  Professional investment management that frees up time for client planning and service

•  Greater “behavioral adherence,” helping clients stick with their long-term investment plan through full market cycles

I believe the research cited above and the extensive feedback we have heard from financial advisers is quite consistent with the overall investment philosophy endorsed by Flexible Plan Investments (FPI) and discussed frequently in this weekly update.

Jerry Wagner, FPI’s founder and president, has summarized the firm’s approach in this way:

“Our strategies are designed to use active strategies to provide another layer of risk management that passive portfolios cannot deliver. In addition, combining these strategies or adding them to a passive portfolio can result in diversification that exceeds the preventative care attainable by a portfolio diversified only by asset classes. … Dynamic risk management and strategic diversification are today’s prescription of choice to prepare for and heal from unpredictable times.”