25 BP vs. 50 BP

Last week, the Federal Reserve lowered the Fed Funds rate by 0.25% or 25 basis points. I agree with the 25 bp move for a couple of reasons:

  • Many other central banks such as the European Central Bank, Bank of Japan, and Bank of China, are lowering rates, so the Fed needs to as well to keep in line with other central banks.
  • If the Fed did not lower rates, it may cause the US Dollar to strengthen to the point that US exports would be more expensive, thereby causing trouble ahead for US exporters.
  • Inflation is not great but deflation may be worse. The Fed targets an inflation rate of 2% +/- and actual inflation has not hit 2% on average for many quarters. Lowering rates should theoretically cause slightly higher inflation, and should also work against deflation.
  • Longer-term interest rates not controlled by the Fed have been trending downward, meaning the yield curve is extremely flat, even slightly inverted at times. The Fed’s lowering of the short-term Fed Funds rate will help to alleviate an inverted yield curve, which in the past has signaled a recession.
The Fed Announces Its Decision

25 vs. 50

Some out there wanted to Fed to lower rates by 50 basis points instead of 25, theorizing that such a move would be a “one and done” and would thereby provide a clearer path within which the US economy could operate, I understand the rationale, but that’s not the way the Fed operates. The Fed has been raising rates (or at least not lowering rates) for 10 years. They weren’t about to reverse course abruptly, and a 50 basis point drop in the Fed Funds rate would have been an abrupt reversal of policy. Perhaps if there had been an emergency, along the lines of the October 1987 stock market crash or September 11, a 50 basis point drop would have been warranted, but current economic conditions aren’t nearly an emergency along those lines. In fact, many economists, as well as 2 of the Fed governors, argued that there should be no rate cut and that the US economy remains strong enough so as not to warrant a cut. Several careers ago, during my time at a large commercial bank doing risk grading of the loans I managed, I learned that the regulators want to see sequential changes in risk grading. Step by step only, and don’t skip any steps. Fed policy is the same way: A 25 basis point drop in rates was the next sequential step, and a 50 basis point drop would have meant skipping a step, which is not the right way to do it.

IMO

I think the Fed’s steps are bullish for asset prices. Lower interest rates mean lower borrowing costs for individuals and companies, which is good for corporate earnings and therefore good for stock prices. Mortgage rates have trended lower all year, which is good for home buyers and home prices, and the Fed’s decision will only help in that regard. Hopefully, longer-term interest rates will stabilize or maybe even trend slightly upward and thereby avoid the yield curve inversion. If you own stocks or own real estate, this is all good news.

Back From Vacation

I am back from a month’s vacation in Europe, first with my wife of now 30 years celebrating our anniversary, and then with a group of friends attending the British Open golf tournament in Northern Ireland and subsequently golfing on the Emerald Isle. What a great trip! Only a couple of days of rain, and we managed to avoid the worst of the European heatwave. Thank you to my wife and to everyone who helped to make this trip of a lifetime happen without a snag!

We visited Florence, Italy on our 30th Anniversary Vacation

Perspective

I haven’t really gotten away from it all in a long time. Seems like my previous recent trips have involved me keeping fully abreast of the news of the day and the financial markets. This trip was different. I really didn’t pay much attention to the day-to-day news, and though I checked the markets every day, it was to see if there were any significant moves one way or another. Being away and out of touch (sort of) helps you to realize that the day-to-day news typically doesn’t have much effect on the direction of the financial markets, particularly the stock market. I believe that some traders get so invested in the news of the day that they fail to see the forest for the trees. The “forest” purview is that the US economy continues to grow; corporate earnings remain strong; some companies (Amazon) are taking market share away from others (other retailers, especially small retailers); and interest rates remain low. All of this is bullish for stocks in general, particularly for those of us who invest in index ETF’s.

Fortunate

At the same time, I was fortunate to have been away during a month of minimal volatility. When I left on my trip, the SPY was at about 295, and it is now at about 300, with few peaks and valleys between then and now. Similar story for the Nasdaq 100. The Average True Range (a measure of volatility) has been small. The VIX Index (another measure of volatility) has declined by about 6%. In short, it has been a good time to have been away from the financial markets. The markets have continued their “melt-up” despite continued fireworks in Washington, D.C. By the way: Missing the daily news from Washington was really great! By getting away, one can see how the 24-hour news cycle feeds the beast, and that it takes on a life of its own that has little or no bearing on how most of the population live their lives.

IMO

I hope I have gained a perspective that I can continue to carry now that I am back in the breach. I have always tried to be above the fray, so to speak, and I hope that this break moves me more in that direction. Please contact me directly if you want to learn more about my trip, or if you want perhaps to share a story about what you have learned through previous trips of your own.

AbbVie Buys a New Basket

AbbVie (ABBV), maker of Humira, a rheumatoid-arthritis drug, announced it is buying Allergan (AGN), maker of Botox. For AbbVie, the reason is to diversify its product portfolio and thereby its cash flow. Humira accounted for over 50% of AbbVie’s 2018 sales, and Humira is coming off patent in the US in 2023, which could severely cut its AbbVie’s sales of that product. With its acquisition of Allergan, AbbVie is attempting to position itself for future revenue diversity, as well as potential growth. With Humira coming off patent, AbbVie had to do something like this.

Mature Product

AbbVie is an example that a company needs to continue to grow in order to survive. Just like oil and gas wells get depleted and less productive over time, so to do drugs like Humira, in large part because the exclusivity goes away when the patent expires. With little in its drug development pipeline relative to the huge size of Humira, AbbVie has continued to hike its dividend. At ABBV’s current price of about $69/share, its dividend yield is about 6.3%. Compare this with 10-Year US Treasuries, which currently yield 2.0%. Companies can either invest their cash flow back into their business in the form of R&D or other internal expenses, or they can pay their cash flow out to their investors in the form of dividends. Companies such as ABBV that pay high dividends typically have not been able to find new products or new businesses in which to invest in an accretive way, and so they have instead paid out more of their cash flow to their investors.

IMO

AbbVie no longer wants to have all its eggs in the Humira basket, and so it is buying a new basket of products in the form of Allergan. Time will tell if the management team will be successful in integrating the new products and people that produce and market those products into a conglomeration that is not as dependent on a major cash cow product that is about to go off patent. As an investor, if you are looking at stock opportunities and see a company that pays a 6.3% dividend, make sure you dig into its story to determine why that company’s dividend is as high as it is. Perhaps you have a situation like AbbVie, where the dividend is high now but where there is a significant risk that the dividend might be much smaller in the not to distant future. Dividends are nice, but just know what you are getting yourself into.

4 Fun Things To Do That Cost Little or Nothing

I am in my later 50s and I hear a lot of people my age who are thinking about retirement but are concerned about what they will do with their time after they retire. It is a reasonable concern especially for those of us who work mega-hours and who perhaps have let hobbies or other interests lapse as they struggle to keep up at their job. It is difficult to transition from having a plethora of outwardly-directed tasks to having to decide what to do with yourself on your own each day. Moreover, it is likely that the paycheck will be no longer forthcoming and you will have to make do with less money. What to do when you are short on money and long on time? Here are 4 ideas:

One Thing To Do That Costs Nothing

Get a Library Card

Even if you might not enjoy reading books, there is likely something at the library that will be for you. Don’t believe me? Go to your local library and check it out (so to speak). Do you like to listen to books on CD, maybe in your car? The library is your source. Do you read books on an e-reader but don’t like paying for them? Your library likely has a way you can borrow e-books and have them sent to your e-reader, or even to your phone. Don’t have time to go to an actual library, perhaps because it is inconvenient for you? Your library’s website has so many resources on it that you may not even need to physically go to the library. If you enjoy buying things online and having them show up on your doorstep, you will also enjoy when you put a book on hold at your local library and you receive an email that your book is ready for you to pick up. It is a great feeling in no small part because you know that you will be involved with this great book for the next 3 weeks. If you do like to read, especially if you enjoy fiction, you then might want to join or form a book club so that you can share your thoughts about the book you are reading. The very best part? It’s Free! Library cards cost nothing. You may not even need to be living in a particular city to obtain a card for its library – sometimes even just being in the same state will work. You can find enough activities to take up an entire day or days just by getting a library card and working with the vast resources at your disposal at your library.

Walk

Vigorous physical training is great, as are training goals such as running a race or some other competition. However, for some people, it may be better just to go out and go for a walk. This costs nothing (I assume you will already have comfortable shoes) and is great for your health. Walking leads to other things, such as fresh air, looking at sights, people watching and spending time with friends or significant others while doing something wonderful together. Want to keep the rest of your body in shape? Do push-ups, sit-ups, and any other number of stretch exercises that you can find with a web search. You don’t have to spend mega-bucks per month for health club dues in order to keep in reasonable shape.

Eat and Drink At Home

If you have more time because you are no longer working as much, you will be able to plan meals, go to the grocery store, buy stuff and cook at home. Say No to going out every day or to expensive home delivery from restaurants. Of course, it still costs money to buy stuff at the supermarket but not nearly as much as it does to go to restaurants every day. Moreover, you will be able to buy and eat a wider variety of fruits and vegetables that are better for you than you would likely buy for yourself at a restaurant. If it isn’t enjoyable for you currently to plan and cook meals, that may be because you don’t have enough time to do so now. Maybe that will change if you suddenly have more time. This could lead to having dinner parties at home and getting to know your friends, neighbors and relatives even better.

Drink Cheaper Alcohol

I read a lot of posts that suggest people should make their own coffee instead of buying it from Starbucks or the like every day. A similar thing goes for alcohol. Instead of going out for drinks, stay in and drink. It’s safer and cheaper. Also, do you really need always to drink expensive IPA’s or Cabernets? Would a regular old beer suffice? As to wine, there are so many options, and if you drink in volume, perhaps you should consider being satisfied with wine that doesn’t cost as much. Maybe not Two Buck Chuck, but there are a lot of good mid-priced wines. Same thing for the hard stuff. Just like those $5 cups of coffee, the expensive beers add up over time, and you might be just as happy with the cheaper stuff.

IMO

Saving or not spending money is central to financial planning. Figuring out what to do with your time while cutting back on your expenditures is also an important part of your finances. With some of these 4 ideas I put forward here, you can work toward accomplishing all of your goals at the same time.

Flooding Danger

Your standard Homeowner’s Insurance policy will not cover you in the event your home suffers a flood. If you are concerned that your house is in a flood zone, you may be able to purchase separate flood insurance through the US Government’s National Flood Insurance program, but it will probably cost you a big premium with a hefty deductible to purchase the insurance.

Missouri River Flooding in March, 2019

In The News

Floods are very much in the news. Heavy rains in the US Midwest caused the Missouri River and some tributaries to overflow, which caused massive flooding in states like Iowa and Nebraska. In the Northeast, if it rains heavily during the late Winter or Spring while the snow is melting, various rivers, creeks and streams will flood. The low-lying Houston area is prone to flooding when a tropical storm hits or even with some heavy rain. One can discuss why this might be happening or if it is happening with increased frequency, but property is being damaged and people’s pocketbooks are suffering.

Flood Zone?

This article from the Wall Street Journal points out that your house might be in a flood zone without you knowing it does because home sellers may not have to disclose prior flooding and because FEMA flood maps may be out of date. Your lesson: Don’t rely on information from others, including the US Government. Instead, rely on your own common sense. Make sure the house you are looking to buy is on high ground, and/or is elevated above ground level. Live somewhere that water flows away from, not where water flows to. If you already own your home, buy the flood insurance (if you can), and also have a drainage or another type of protection plan so that your home doesn’t flood. Installing a drainage system for your property might be money very well spent if it prevents your home from flooding.

Renters

“I rent, and I have renter’s insurance, so I’m covered if it floods, right?” Well, unfortunately, you are not. Renter’s insurance is like homeowner’s insurance in that, if water comes up from the ground (as with a flood), damage is not covered. If you rent, the same logic applies: Use your common sense. Rent on an upper floor, if possible. Live on high ground, and keep your valuables out of harm’s way in the event of a flood.

IMO

If you live in an area with lakes, rivers, creeks, harbors, or other bodies of water, and you are concerned you may be in a flood zone, your concerns are valid. A 3rd standard deviation-type storm may hit and your property could flood. Your best course of action is to use common sense and to take steps ahead of time to prevent flood damage rather than to seek compensation or reimbursement after the flood happens.

Disruptive Technology

A new technology is invented that makes producing a product quicker or cheaper, and the new technology renders an older technology obsolete. It’s a story that has happened throughout history. Autos and trucks supplanted wagons pulled by horses. Planes supplanted trains – for some uses, not all. Austrian and Harvard economist Joseph Schumpeter used the term “creative destruction” in the early 20th Century to describe this process. In more recent years, another Harvard economist, Clayton Christensen, used the example of how steel companies recycled steel to make rebar, and thereby disrupt the steel industry by lowering input costs. Disruption can happen through products or processes. As an investor, think about companies who are doing the disrupting vs. companies whose products or processes are being disrupted by new products or processes. Invest on the side of the disruption.

Legg Mason

Disruption is happening in the financial services industry. The latest example is the tribulations of Legg Mason, a well-established investment management firm, famous for its mutual funds. Legg Mason’s core mutual fund business is being disrupted by alternatives such as low- or no-cost ETF’s as well as by the stable of funds available through Vanguard, Schwab, and the like. More and more, investors don’t see the value in investing through Legg Mason when they can get the same basic products with similar or better performance through Vanguard. As a result, Legg Mason is losing assets under management to Vanguard (and Schwab and other similar firms). Legg Mason is publicly traded, and it’s stock took a big hit with the 2008 Financial Crisis and has never really recovered. Legg Mason’s stock is down about 50% since its pre-financial crisis high. Now Legg Mason is in a control battle with hedge fund Trian and its takeover-experienced leader Nelson Pelz. I don’t see Pelz’ wisdom in this – he is, after all, the guy who has lost an estimated $1 Billion in General Electric over the past several years (according to Fortune magazine). However, perhaps there is light at the end of the tunnel if a few things break right.

IMO

My point is that you should look at a company or an investment from the standpoint of, “Is this a disruptive company?” or “Is this a company that is vulnerable to disruption?” Most times, it makes sense to invest with the company that is the disruptor, because if they truly have a cheaper or better product or process, the world will eventually come to them, though it may take some time to do so. Stocks in disruptive companies usually don’t come cheap, at least from the standpoint of P/E ratio. However, it is probably better to be on the side of history, despite the price. Not all disruptive technologies or companies will make it – for instance, the jury is still out and will remain so for Tesla. So, don’t bet the farm on any one disruptive technology. Even Elon Musk, CEO of Tesla, has diversified, via SpaceEx, the Boring Company, and other smaller ventures. Not all individual companies will make it, but disruptive technologies and processes will always be a thing and you can make good money following these disruptors if you do it the right way.

Technology and Inflation

Vanguard posted this interesting article on May 30, 2019, titled “Amid tight job market, tech drives low inflation.” The article contains a chart that shows that core inflation has been below the Federal Reserve’s 2% target for most quarters during the past 20+ years. This period has coincided with the explosion in technology and the advancement of innovations that have aided productivity. As technology has grown and improved, inflation has been kept at bay, and interest rates have remained low.

The Cost of Technology has declined significantly

Sectors Affected

The Vanguard article also has a chart that shows various sectors of the economy and how much they calculate each sector has benefited from improved technology. The single sector that has benefited the most is, not surprisingly, the information technology sector. It makes sense if you think about it. Consider the computing power contained in a new iPhone today vs. its power when it was introduced back in 2007. The new phone may cost 3 times as much as the 2007 model, but you are getting over 30 times the amount of RAM and storage capacity (source: Computerworld.com). IPhones have over 10 times the capacity of a Cray Supercomputer from 35 years ago. Moore’s Law, in the flesh. It’s not that we are spending less for our iPhone (and laptop) units, it’s that we are spending a lot less per gigabyte of computing power. The more power we have, the less likely it is that inflation rears its head.

Among the other sectors Vanguard analyzed, the two most affected by improved technology are Professional Services and Manufacturing. Think about how more advanced banking and finance (included in Professional Services) are now compared with 20 years ago. Technology has transformed stock trading, to name one example, so that it is now seamless and very cheap to invest your money. As to the manufacturing sector, there is a lot of talk about robots and how they will displace so many workers, but the effect is that manufacturing automation has kept prices very low.

Globalization

It is not the point of the Vanguard article, but another reason inflation has been tame for 20 years (and more) has been globalization. The expansion of the manufacturing base to other, low labor-cost countries throughout the world has meant that there is competition for manufacturing plants. With increased competition, the cost of goods manufactured and sold has remained low. Do you think we are anywhere near a point in this world when we are maxed out on production capacity? I don’t think so. Tariffs aside, there is no evidence that we are about to embark on a period of higher cost of manufactured goods.

IMO

As long as inflation remains as low as it has been for the past 20 years, we are well-set for further economic expansion, in the largest macro sense. Technology has played a big role in keeping inflation low, and I don’t see any reason why this trend should not continue in the next 20 years. Does this mean the Federal Reserve should change its policy toward interest rates? Not necessarily, but I do believe that the Fed’s ability to tweak the economy by quarter-point changes in the Fed Funds rate are overrated, and that investors should look beyond what the Fed does and instead consider the effects of continued exponential improvement in technology and what that may mean for the long-term trend in inflation.

Libra and Stablecoins

Facebook (FB) has announced it will move forward with a new cryptocurrency it has named Libra. Although it will be based on blockchain technology, as is cryptocurrency leader Bitcoin, Libra will differ from Bitcoin in that it will be a “stablecoin”, meaning its value will be pegged to other currencies and thus will be much more stable in value than Bitcoin. Why is it important that Libra’s value remains relatively stable? Because Facebook envisions that its users will use Libra to pay for real things. If Libra’s value remains stable, people will be more likely to use it as intended. There are stories out there of early Bitcoin owners paying for coffee with Bitcoin when Bitcoin was valued at $50 or less, prior to its explosion in value to $20,000 (1 Bitcoin is now worth about $9,000). Imagine how foolish the people who bought coffee for Bitcoin feel, now that Bitcoin’s value is where it is! If people think that Libra’s value could follow the same path, they would be much less likely to use it. Facebook wants people to actually use Libra rather than to buy Libra and hold on to it, and so that’s why they created Libra as a stablecoin.

Upend the Payments Market

One thing I enjoy about the financial media, in particular, is its wild speculation about new products and how they will take over the world. For Tesla, for instance, the speculation was that people would soon be buying electric cars en masse and the internal combustion engine and fossil fuels would become obsolete. Now, electric cars have made good progress, but they are a long way from supplanting traditional cars and trucks. Now we have the introduction of Libra, and the press is speculating that Libra could take the place of traditional payment methods such as credit cards (cash being already too-20th Century to be cool). Maybe this is Facebook’s “in its dreams” goal, but I’m guessing Facebook is really thinking, “Let’s introduce this, see how it works, maybe make some tweaks, and go from there.” No world domination just yet, but it is a thought out there.

Secrecy

One of the appeals of Bitcoin and other cryptocurrencies is that transactions would be secret, and not traceable. Now we have Facebook, a company that has been ripped in the media for lax controls on secrecy and data and identity confidentiality, to say nothing about fake accounts, getting involved with a product that is appealing because of its secretive nature. Put me down as a skeptic that Facebook can pull off this secrecy aspect of Libra. To that end, Facebook has put together a governing board of other companies to try to establish that Facebook alone won’t control your data. We will see how well this goes.

IMO

I believe it is a smart move by Facebook to create Libra as a stablecoin if Facebook wants people to use Libra to buy stuff. Facebook will have to work on making sure the purchasing process goes smoothly, because, with Bitcoin, the purchasing process is not smooth. If all goes well, Libra could be successful, but I believe it will take much more than Facebook and its crony partners to truly upend the payments system in the United States. A good chunk of the established system of finance stands to lose if Libra is successful, meaning that these established banks and the like will have to jump on board or adapt themselves. Then there are all of the regulatory bodies of the US Government; let’s see how that plays out. If you want, go ahead and buy some FB, especially if you can afford to lose some money. After all, FB isn’t a pure play on cryptocurrency – they also have a social network, as you might recall.

I relied heavily on this article in the Washington Post and this article from the Wall Street Journal to write this blog post.

Cup and Handle Pattern

Today I will go into the “Cup and Handle” pattern, which is a chart reading technique that may or may not help you on the road to riches. I don’t advocate its usefulness one way or another, but you should be aware of it because you may be looking at a stock chart someday and think you may see the cup and handle, and you may be right, or you may be wrong.

Mastercard Stock shows Cup and Handle Pattern

Example

The chart above is an example of a cup and handle pattern. The cup is the u-shaped formation underlined in blue, and the handle is the relatively short period outlined in blue wherein the stock reaches back to its high and then sells off slightly. Proponents of the cup and handle will tell you the time to buy is when the stock reverses its “handle” sell-off and then breaks above its prior high. In this chart (of Mastercard stock a couple years back), the buy period is in late August or early September, if you can read the dates.

Patience

One key of making use of the cup and handle pattern is patience. You need to wait for the pattern to develop. Think about the National Football League, when the commentator says the running back needs to be patient and wait for his blocking to develop. It might have been tempting to buy when the stock began to retrace gains it had made early in the chart – during what is called the “consolidation” phase of the stock. If you did buy during consolidation, you may have made out ok, but you may also have had to wait a while before you were proven right. The psychology behind it is that investors make money on the way up (early in the time period shown in the chart), then do some profit-taking perhaps because they see other, better opportunities out there. When old investors sell, new investors come in, while the company keeps improving its profits and cash flow. As the consolidation phase gets later in the cycle, the new investors hold on because they haven’t made their money yet. That’s when the handle forms, and then the company makes new highs (according to cup and handle proponents).

More Patience

You can see from this chart that it takes weeks and months to go through the consolidation phase and to form the cup and handle pattern. If you are a short-term or even a day-trader and you see a pattern that looks something like a cup and handle, it isn’t. Your eyes are deceiving you. Although the emotional cycle of an investor has admittedly been sped up in recent years, a true cup and handle takes a long time to develop and is not a pattern to be used for day trading.

Investors Business Daily

One of the main proponents of the cup and handle pattern is the newspaper (now website) Investors Business Daily and its founder, William O’Neil. IBD puts on one-day training sessions and teaches how to look for and use the cup and handle as its main trading tool. IBD claims to have tested it and it works – that’s their claim, not mine. That said, IBD does a great job identifying stocks that tend to go up over the long term. I am an IBD subscriber, though I don’t trade based on their cup and handle recommendations.

IMO

Again, my only objective is to educate my readership about cup and handle patterns and to recognize one when you see one, when you are spending time inputting stock ticker symbols into free stock chart websites such as stockcharts.com or finviz.com. Make sure the pattern you see has taken weeks or months to develop because, even today, that’s how long it takes for investor psychology to evolve from a profit-taking phase to a more long-term hold phase.

Active vs. Passive Investing

This blogger believes, despite the title, that Active investing is not dead – it is just out of fashion now because we have been in a long-term uptrend in the stock market for the past 10 years. He believes the flow of funds from Active to Passive investments will reverse itself if and when the market goes through a several-quarters-long tough stretch. I understand the blogger’s point, but I don’t fully agree. I believe there is always a place for active investing, but the active investor really has to know their business.

Active Investing

Active investors try to beat the S&P 500 return (usually) by attempting to buy undervalued assets at a good price and then selling them at a higher price. The Strong Theory of efficient capital markets hypothesizes that this can’t be accomplished, but there are investors out there who have done it, perhaps only for a relatively short span of time. The most well-known Active investor out there is probably Warren Buffet. Buffet’s (and Berkshire Hathaway’s) advantage is that they have enough cash to purchase entire companies, rather than small-lot shares of companies. They thereby control the cash their investments generate, which is not the case for the ordinary investor. Anyone who dabbles by buying individual stocks believes that their stock picks will outperform the general market, and so they are inherent believers in Active Investing. “Active” is different than “Activist” investing. The latter type of investor tries to influence corporate decisions in some way – think of Carl Ichan trying to oust various corporate management teams.

Economist Joseph Schumpeter coined the term “Creative Distruction”, meaning that new technologies or processes constantly supplant old ones, thereby rendering the old ones obsolete. Creative Distruction means that there will always be new up-and-coming companies out there growing their profits, taking away from older companies, while growing the overall economy in the process. The creation and the destruction means there will always be opportunities for Active investors if they correctly foresee the Creative Distruction. It so happens that most of the “creation” in recent years has been by tech companies. The high cost (in terms of price to earnings or price to sales) of these tech companies is off-putting to traditional Active investors who tend to be more value-driven. Nontheless, Active investors who have been on top of the “tech wave” and “FAANG” stocks have done well in recent years.

Passive Investing

Passive Investing means you buy index funds. You may tinker with allocation levels among different funds and different asset classes, but you are not trying to pick individual stocks. This type of strategy is lower maintenance, lower cost (in terms of fees and commissions paid to fund managers), and it fits with Modern Portfolio Theory and the Efficient Markets Theory, which posits it is impossible to outperform the index.

It is true that most stocks are correlated, and if it is theoretically impossible to outperform the market, you may as well join in and invest in index funds. It is also appealing to save money by investing in low-cost Index ETF’s through the likes of Vanguard. Also, if you have a day job and a family, then use your mental energy for those tasks rather than looking at your investment portfolio every day. Index ETF’s are a great innovation – themselves evidence of Creative Destruction in the financial services industry.

IMO

My point is to educate you about Active vs. Passive investing, show some examples of each, and get you to think about how you invest in what you invest in within the framework of Active vs. Passive. It may not be “cool” or “macho” to think of yourself as Passive, but it is probably the best way for you to achieve your financial goals.