Maz Jadallah who runs the Alpha Clone ETF (ALFA) had a blog post about how ALFA can help blur the line between active and passive management. He makes the observation that the extremely narrow leadership in the market that has driven the S&P 500's very strong returns helping passive outperform. We've seen this before, most recently in 2000 when big tech lifted the index. Maz is correct that it is not sustainable. ALFA mimics top performing hedge funds based on their 13-f filings. The long term track record of ALFA supports part of his argument. ALFA started to lag the S&P 500 about the time that FANG become a thing.
Read the post but I frame it a little differently. To be clear, I do believe in active management but is not a dogma on my part some much as the belief that there really is no such thing as truly passive, that life circumstances require changes be made along the way and the nature of human responses to adverse market conditions leads to enough mistakes that I think it is crucial to try to soften some of the blow that comes with adverse market conditions.
The way my portfolio management style has evolved, it seems like there are times where you need to be more active than others. For the last couple of years as the market went up with ever decreasing volatility, there were far fewer trades to place. Just about everything was going up. I would say nothing has changed despite the panic early in February. Looking at a longer term chart, the uptrend is still in place. I make those comments/observations as a long term investor. The best thing I believe I can do for clients is to make sure they capture a reasonable portion of the upside and then insulate from as much of the downside as possible. By downside I mean true bear markets, not panics/crashes.
At some point the market will roll over, maybe the monthly decline for February is the start or not, who knows but when it does start to decline then I will need to be more active in the portfolio. After that decline, the market will turn up and that too will be a period requiring more activity.
The takeaway is to stick to whatever investment process you chose, believing it was best for you and avoid the active/passive debate entirely. It is a waste of time for you managing your own portfolio and I would argue it is a waste of time for advisors trying to help clients get to where the need/want to be.