Why Your Asset Allocation Shouldn't Be Passive
“Just buy the index” has had a great forty years. So great that it’s become the default advice everywhere: the financial press, the bank branch, the robo-advisor, a whole generation of advisors who’ve never had to do anything else.
We don’t think it’s wrong. We think it’s incomplete, and increasingly unsuited to the market we’re actually in.
Here’s what a passive portfolio actually is, when you strip the marketing language off: a bet that the next forty years will look roughly like the last forty. Disinflation. Bull market in bonds. Globalization compressing costs. U.S. equities outperforming everything else. One benchmark (the S&P 500 or a 60/40 mix) captures the consensus outcome, and the consensus outcome has, for most of living memory, been good enough to retire on.
That is a specific set of assumptions about the world, not a universal truth.
The regime has changed
We work inside a framework that recognizes markets move through distinct regimes, and the assets that win in each are different. Growth accelerating with inflation falling is one regime. Growth slowing with inflation rising is another. Those two worlds want opposite portfolios. Any strategy that can’t tell them apart will underperform in at least one of them.
Our read, based on the research we rely on, is that the operating regime today is closer to stagflation than to the goldilocks conditions of the 2010s. Growth is uneven, inflation is sticky, government deficits are structural, and the bond market is no longer a reliable hedge against equity drawdowns. That’s not a forecast. That’s what the data show as of this writing.
Two things follow from that.
The 60/40 is compromised
A traditional balanced portfolio assumes that when stocks fall, bonds rise. For four decades, that was broadly true. In 2022, both fell together, making it the worst year for a 60/40 portfolio since the 1930s: stocks down roughly 18%, bonds down roughly 13%, and the blended portfolio off roughly 16%. Both were expressing the same thing: a rise in interest rates driven by inflation.
That correlation regime hasn’t reset. The diversification that made 60/40 a sensible default isn’t available in the same way today.
When we build client portfolios, we treat the bond allocation as one tool among many: useful for income, useful for selective duration when rates justify it, but not the automatic shock absorber it used to be.
What replaces it
Thematic and regime-aware positioning. Specifically:
- Energy and hard assets. In a world of fiscal dominance and sticky commodity inflation, real assets do what bonds used to do. We own energy equities and related sectors intentionally, at weights above what any passive benchmark would give you.
- Managed futures. A strategy that can go long or short across dozens of asset classes based on trend signals. It pays us nothing in quiet markets, and meaningful amounts in the dislocations that break everything else. We call this crisis alpha, and we pay for it knowingly. It’s a significant position in most of our portfolios.
- Equity selection with a thesis. Not stock-picking as sport. We own companies because we understand their place in a macro picture we can defend: the energy transition, the shape of U.S. fiscal policy, the actual demand for data center power. If we can’t articulate why a position is there, it doesn’t belong there.
- Hedges and convexity. Not constant drag, but deliberate tail protection when volatility is cheap and our read on the regime warrants it.
None of this is fast trading. Core positions are meant to be held, and much of our activity is adjustment around them rather than exits from them. The point is not activity for its own sake. The point is that the allocation decision, the biggest driver of long-term return, shouldn’t be set and forgotten.
What we are not doing
We are not picking stocks like a hedge fund. We are not chasing momentum. We are not predicting the next six months. Regime-aware doesn’t mean short-term. It means the building blocks we use, the weightings, the factor exposures, the hedges, get revisited when the evidence changes, rather than reset on an arbitrary calendar.
We are also not contrarian for the sake of it. When the consensus is right, the portfolio looks a lot like consensus. When the consensus is betting on a world we don’t think we’re in, our positioning diverges. The research discipline is what decides, not a mood.
The tradeoff
Active positioning means accepting that we’ll be wrong sometimes, and having a process for updating when we are. A passive portfolio never has to have that conversation. That’s part of its appeal, and part of its limitation. If the consensus turns out to be right, a passive portfolio tracks it. If the consensus is wrong, a passive portfolio tracks it into the wall.
Who this is for
This is for any client who wants a portfolio they can explain. If you own something, we should be able to tell you why: the specific role it plays, the specific regime assumption it reflects, the specific risk we’re paying it to absorb.
If your current portfolio is a generic mix of ETFs whose purpose your advisor can’t articulate, that’s the problem we solve. Not by adding complexity for its own sake, but by making every position do real work.
If you would like to hear what each piece of your portfolio is actually doing, ask. The consultation is a conversation, not a sales call.