At EdgeRock, we believe your investment strategy should do more than just keep up with the market—it should respond to it in ways that make sense for your financial plan.

In recent years, passive investing has surged in popularity, and for good reason: It’s cost-effective, transparent, and often performs well when markets rise. But as we’ve seen time and time again, markets don’t always go up. In volatile or declining environments, active investment management becomes not just helpful—but essential. This is where we believe our value as your wealth management team shines. The goal isn’t just to follow the market, but to navigate it with foresight, discipline, and adaptability. Here’s why that matters to your portfolio.

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Understanding the Difference

Let’s start by clarifying the distinction.

Passive investing is about matching the market. Investors buy index funds or ETFs that track a broad benchmark—like the S&P 500—with the goal of replicating its returns. It’s simple, low-cost, and transparent, with minimal need for day-to-day oversight. Jack Bogle, Vanguard’s founder, helped popularize this approach by creating the first index mutual fund for everyday investors.

Active management, on the other hand, is about making informed investment decisions to beat the market. Active managers research individual companies, monitor market conditions, and make tactical adjustments to try to generate better returns than a passive benchmark. For example, they might reduce exposure to a sector they believe is overvalued or allocate more to areas they expect to outperform.

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Why Active Management Gets a Bad Rap

It’s true—active management has faced criticism. A key reason is underperformance. Over long time periods, many actively managed funds haven’t kept pace with their benchmarks, especially after accounting for fees. Studies like S&P’s SPIVA report have shown that over 85% of large-cap U.S. equity managers underperform the S&P 500 over a 10-year span.

Some of this is due to a phenomenon called closet indexing—when active managers closely mimic an index to avoid straying too far from benchmark returns, yet still charge higher fees. Why would they do this? Because the professional risk of being wrong (and losing clients or getting fired) is often greater than the reward of being right.

Other concerns include survivorship bias, where underperforming funds quietly shut down, skewing performance data. And many academics argue that markets—especially in large-cap U.S. equities—are too efficient for most managers to consistently find “alpha,” or excess return.

At EdgeRock, we believe markets are efficient—but not too efficient. There are still opportunities for skilled managers to add value, particularly in certain market segments and environments.

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Where Active Management Wins

Despite the criticism, active management plays a vital role in building resilient portfolios. There are areas of the market where active managers consistently outperform:

• Small-cap stocks
• Bond funds
• Real estate funds
• International small caps

In fact, in 2023, over 50% of active managers outperformed their benchmarks in these areas. Roughly 46% of international small-cap active funds beat their benchmark that year alone.

Why? These segments often have less analyst coverage, more pricing inefficiencies, and greater opportunity for skilled managers to uncover hidden value.

At EdgeRock, part of our job is to identify these high-performing managers and thoughtfully integrate them into your portfolio.

Even among large-cap managers, those willing to hold cash when they can’t find good opportunities may lag during bull markets like 2024, but help cushion the blow in more volatile periods—like what we’ve seen so far in 2025. Over time, losing less in down markets often results in better long-term returns, thanks to the power of compounding.

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Why Active Matters Most in Down Markets

Active management becomes especially valuable when markets are turbulent. Here’s how:

• Risk Mitigation: Active managers can reduce exposure to overvalued sectors or companies in decline.
• Flexibility: They’re not tied to an index and can move to cash or safer sectors like utilities or healthcare.
• Opportunity Capture: Market volatility creates pricing errors—good active managers can spot them.
• Downside Protection: They can use hedging strategies or invest in assets that aren’t correlated with stocks.
• Avoiding Index Concentration: Passive funds often concentrate in top-performing names (e.g., the “Magnificent 7”). In downturns, this can backfire.
• Behavioral Discipline: Emotions often drive poor investment decisions. Active managers bring structure and rationality when it matters most.

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A Balanced Approach Is Best

Passive investing works well in strong markets—and we believe it has a role in every portfolio. But downturns are inevitable, and when they come, active management can protect your capital, capture new opportunities, and keep your financial plan on course.

That’s why we recommend a blend of both. Our job at EdgeRock is not to choose sides—but to choose wisely. We tailor portfolios to your goals, and in doing so, we apply the right balance of passive and active management to help you navigate whatever the market brings.

At EdgeRock, we believe your investment strategy should do more than just keep up with the market—it should respond to it. In recent years, passive investing has surged in popularity, and for good reason: it’s cost-effective, transparent, and often performs well when markets rise. But as we’ve seen time and time again, markets don’t always go up. In volatile or declining environments, active investment management becomes not just helpful—but essential. This is where we believe our value as your wealth management team shines. The goal isn’t just to follow the market, but to navigate it with foresight, discipline, and adaptability. Here’s why that matters to your portfolio.

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