That's a truism. I could say the same thing about algorithmic trading.
The fact of the matter is that the median hedge fund manager has negative alpha. It is extremely difficult to pick winners via any strategy. In fact, it's so difficult that for people who can do it, the resulting lifestyle and compensation is so great that the asset management shops that they work out have almost zero attrition.
Moreover, the whole point of passive investment is that the odds of that kind of a market-wide crash affecting your money over a 30-year timespan are infinitesimal. If the market actually were to devolve like that, nobody would make money in the market, regardless of strategy.
> Investors should be looking for ways to systematically protect themselves from the market's irrational mood swings.
Yes, it's called diversification.
I won't harp on the backtesting point, but what I will say is this: I'm sure that you understand the risk-reward tradeoff. It would be impossible to participate in any sort of finance and not know this concept. Quite frankly, the probability of 30%+ of your life savings being wiped out in an index fund is unbelievably low. You eat some return at the expense of lower volatility, but we're talking about a 401(k) here. We want that kind of expected stability.