As you approach retirement, choosing the right investment strategy becomes even more crucial.
There’s a long-running debate between active and passive investing. But let’s clear up what “active” really means. To us, active investing means actively managing risk. We’re fee-only investment advisors with nearly 50 years of experience. And we believe this approach works better—for two big reasons.
First, there’s something called the “law of large losses.” It’s the idea that avoiding big losses matters just as much as making gains. We’ll share an example of this later in the article. Second, market downturns are stressful. Many investors panic and make emotional decisions. That can seriously hurt their long-term financial goals.
Passive investing can seem like an easier path. It’s simple to understand and takes little effort. You just “set it and forget it. But is any investment approach truly worry-free? If markets only went up, passive investing would be perfect. But they don’t. History shows that downturns can be long—and painful.
Set It, Forget It… Regret It?
Passive investing is built to capture market gains. But it also takes in all the losses when markets fall. While passive investing can be effective in certain environments, it may expose retirees to uncomfortable drawdowns during market downturns. That’s a big problem for retirees who depend on their investments for income. When bear markets hit, many passive investors are caught off guard. They realize too late that they were taking on more risk than they thought. Often, they panic and sell at the worst time—after the losses have already piled up.
One of the biggest drawbacks of passive investing is that it sticks to a fixed mix of investments. It doesn’t adjust for changing economic conditions. Rebalancing—selling what’s done well to buy what hasn’t—may sound smart in theory. But in a downturn, it can actually make things worse. For retirees, that can be both financially painful and emotionally draining.
Take the 2008–2009 bear market as an example. It wiped out five years of stock market growth in just over a year. And passive investors had to wait until 2013 just to get back to where they were. That’s a long time to be stressed about income. While many long-term investors eventually recovered, the interim volatility and stress were significant—particularly for retirees making regular withdrawals.
Supporters of passive investing often downplay how damaging bear markets can be—not just to portfolios, but to peace of mind. But in our experience, many passive investors who’ve been through major downturns have expressed disappointment or concern
In Retirement, Preserving Wealth Matters More Than Growing It
For retirees in the “distribution phase” of life, the stakes are even higher. Unlike younger investors who can continue contributing to their portfolios and take advantage of lower prices during downturns, retirees must withdraw funds regardless of market conditions. Selling assets at low prices to generate retirement income can significantly erode a nest egg, making it difficult to maintain your standard of living.
Given these risks, retirees should carefully consider the benefits of active risk management. A strategy that helps mitigate losses during downturns can provide greater financial stability and peace of mind in retirement. Selecting the right investment approach isn’t just about maximizing returns or seeking the lowest-cost setup—it’s about protecting your hard-earned savings and better ensuring a comfortable, secure retirement.