How many investing styles or strategies are there? Double digits? Dozens? Hundreds?

What about an investment approach that has the freedom to pick and choose among myriad investment alternatives for a cohesive multi-strategy approach? And one that can supplement strategies with any number of tactical tools?

A dynamic, risk-managed active investment approach has the ability to feature many strategic alternatives, with an overall objective of managing risk first. Active management seeks favorable risk-adjusted returns in any market environment, generally employing sophisticated algorithms and models to capture gains and protect against losses in a wide variety of sectors, asset classes, and geographies.

1. Buy-and-hold is dead(ly)

Long-term advocates of buy-and-hold strategies and critics of “market timing” have been emboldened with the current 4-plus year bull market in U.S. equities. The theme of “I told you so” is conveniently being bandied about as justification for “buy and holders.”

However, what is often overlooked is how it has taken unprecedented global monetary policy to fuel the bull market, with even the Federal Open Market Committee (FOMC) becoming increasingly concerned about the risks of financial instability fueled, in part, by its own actions.

Outsized bull market gains have also overshadowed the true state of equity market returns for the past 15 years, with the average annualized return through year-end 2013 standing at a non-risk-adjusted 4.7%. While nothing to sneer at, the pain and volatility endured for those gains has been monumental for those willing to stick it out.

Investment expert and author Kenneth Solow pretty neatly wraps it up in saying, “Patiently waiting for stocks to deliver historical average returns does not rise to the level of an investment strategy.”

2. Bear market math is daunting

Active managers recognize the mathematical difficulty of recovering from major drawdowns to portfolios and understand that the next big move downward may always be lurking just around the corner, with catalysts coming from virtually any part of the globe.

It takes longer than most investors think to recover from bear markets. There were 15 bear markets, defined as those periods when the S&P 500 fell at least 20%, between 1929 and 2009. Omitting the 1929 crash, it took 3.5 years on average to break even after a crash.

And the math is a major reason why, with a gain of 50% required to overcome a 33% portfolio loss. With the average lifespan of a bull market historically about 56 months (four years, eight months), there is good reason to want to avoid those portfolio-crushing years destined to come around again.

3. Risk first. Always.

Those practicing today’s modern active management are by definition employing high standards of risk management.

FINRA classifies risk as both systemic and non-systemic.

Systemic risk, as explained by FINRA, is synonymous with market risk and relates to factors that affect the overall economy or securities markets. It affects the broad markets and virtually all companies—regardless of the company’s financial condition, management, or capital structure—and, depending on the investment, can involve international as well as domestic factors. Examples include interest-rate risk, inflation risk, currency risk, liquidity risk, and sociopolitical risk.

Non-systemic risk, as its name suggests, is more company-specific in nature and can cover areas such as common business or category risks, management risk, or credit risk.

With many definitions of “risk,” is it any wonder active managers are strong advocates of addressing risk at the individual client portfolio level, in the development of macro strategies, and in employing shorter-term tactical tools?

But perhaps most importantly, active managers evaluate strategic diversification and asset-allocation decisions on a risk-adjusted basis, running powerful simulations over hundreds of scenarios to develop strategies that can match investor risk profiles with the appropriate strategies. These processes help balance the pursuit of investment return with the appropriate risk-management framework. As one prominent active manager has said, “No one would ever jump into a car without brakes, so why would investors even consider having an investment strategy that does not have a strong defense?”

4. Active management aligns with investor psychology

The deep market losses associated with the 2007-2009 financial crisis dramatically rekindled academic, media, regulatory, and financial-institution interest in the topics of investor psychology and behavioral finance.

While there are a multitude of studies and texts on various aspects of investor psychology, it is noteworthy to examine the anomaly of two major, and seemingly contradictory, theorems existing in the same space today. There is something of a barbell distribution between those investors suffering from a euphoric “short-term market memory loss” and those who remain paralyzed with extreme cases of “loss aversion.”

Put another way, many investors have abandoned prudent behavior, once again, in chasing market returns, while an equally large number of investors are seemingly permanently on the sidelines.

Interestingly, active management offers solutions to both of those classes of investors, and frankly all of those in between.

It takes longer than most investors think to recover from bear markets.

Active managers can provide even the most aggressive investors with the proper dose of risk management in the context of strategies aimed at capturing a fair share of bull market gains. Active management strategies can even offer leveraged, trend-following equity and fixed-income substrategies as part of an overall portfolio mix. Of course, more aggressive strategies will carry higher risk and the potential for relatively larger drawdowns in volatile markets.

On the flip side, investors hesitant to reenter equity markets may find some logic and comfort in an actively managed approach that quantifies their specific appetite for risk and employs strategies appropriate for that profile. Even the most conservative investor can be accommodated under the active management umbrella, with the knowledge that highly diversified portfolios are expertly managed to specific guidelines every day, week, month, and year.

5. Does “set it and forget it” really make sense?

In today’s global markets, economic and market conditions have the potential for rapid change. Most of the investment world’s reliance on traditional “style box” asset-allocation strategies has not changed to any great degree in the last 30 years, while markets and the proliferation of investment vehicles have undergone major transformations—and not always for the better.

Today’s investment world demands new thinking and dynamic strategies to react to the changing market environment—and most importantly, a holistic risk-managed investment approach that can select from all asset classes and geographies, numerous strategies and tactics, and even employ multiple managers.

Strategic diversification and active management methodologies can help to reduce risk while providing favorable expected returns. Investors should be as concerned about limiting downside risk as they are interested in longer-term portfolio growth.

Sam Stovall, of S&P Capital IQ’s Equity Research Group, memorably said of the market’s performance in the first part of the 21st century, “I’ve lost a bet. I’ve lost my keys. But I’ve never lost a decade—until now.”

While the S&P 500 has yet in its history to suffer back-to-back decades of negative performance, active investment management offers a very viable approach for most investors—no matter what the broad market may bring in coming years.

The opinions expressed in this article are those of the author and do not necessarily represent the views of Proactive Advisor Magazine. These opinions are presented for educational purposes only.