Money For the Rest of Us

As indexing grows, active stock pickers are underperforming the market by increasingly large margins, even as their skill improves. In this episode, we explore why this is happening and consider whether active managers can outperform again. Finally, we explain how to position your portfolio using index funds and ETFs without overweighting the S&P 500 Index.

Topics include:

• Why active fund managers keep underperforming
• Michael Mauboussin's paradox of skill in investing
• How much of the stock market do index funds own?
• William Sharpe's arithmetic of active management
• Why index funds still have to trade
• Active vs. passive: stock pickers are lagging more than ever
• How index fund flows hurt active managers (Unterberg study)
• Example: how $100 of fund flows moves stock prices
• Who buys the stocks active managers sell?
• Do fund managers sell their best ideas during outflows?
• Who sells shares to index funds? Companies and insiders
• Will active management outperform again?
• Will retiring baby boomers crash the stock market? 19:38 How to invest when index funds drive stock prices

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Show Notes

Episode 567 transcript

Episode slides

Sharpening the Arithmetic of Active Management by Lasse Heje Pedersen—SSRN

We Now Know Who Really Benefited from the Index Revolution by Aaron Brown—Bloomberg

The Investing Mind by Michael J. Mauboussin—Harriman House

Who Clears the Market When Passive Investors Trade? by Marco Sammon and John J. Shim—SSRN

Passive Flows, Active Woes: Passive Investing and the Decline of Active Mutual Fund Alpha by Hannah Unterberg—SSRN

Boomer Retirement: Headwinds for U.S. Equity Markets? by Zheng Liu and Mark M. Spiegel—Federal Reserve Bank of San Francisco

Is Boomer Retirement Still Weighing Down U.S. Equity Markets? by Zheng Liu and Mark M. Spiegel—Federal Reserve Bank of San Francisco

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In this off-week bonus episode of Money for the Rest of Us, we look at the possibility that current U.S. stock valuations are justified and the market is not overvalued.

Topics covered include:

• Two ways to measure P/E ratios and which is more accurate
• How record profit margins are affecting P/E ratios
• How concentration risk is at an all-time high for U.S. stocks
• How the stock market's direction will depend on whether profit margins expand, contract, or stay the same.
• Where to invest to reduce an overconcentration in U.S. stocks.

Episode Slides

Episode Transcript

Slides, transcript, and show notes also at: https://moneyfortherestofus.com/.

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We analyze long-term stock returns when investing at market peaks and bottoms, and when stocks are cheap or expensive.

We also share what we think stocks will return over the next decade and why.

Finally, we simulate the investment outcomes for someone who invests $50 per week.

Episode Slides

Episode Transcript

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I provide a short update on Money for the Rest of Us and introduce our listener survey. All survey participants will get access to an exclusive podcast episode on my worst investing mistakes and what I learned.

Take the Money for the Rest of Us Listener Survey

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In this episode, we explore why the income we earn isn't the same as the return. We show how option income strategies work, what their historical returns have been, what drives the return, and what reasonable return expectations are.

We show why option income strategies have a positive expected return while sports betting has a negative expected return.

Finally, we look at other areas where we confuse income with the total return.

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Show Notes

Episode slide deck

Variance Risk Premia by Peter Carr and Liuren Wu—NYU

Cross section of option returns and idiosyncratic stock volatility by Jie Cao and Bing Han—The Journal of Financial Economics

The Price of Correlation Risk: Evidence from Equity Options by Joost Driessen, Pascal J. Maenhout, Grigory Vilkov—SSRN

Cross-section of option returns and volatility by Amit Goyal and Alessio Saretto—The Journal of Financial Economics

The Art of Put Selling: A 10 Year Study by John Marshall, Krag Gregory, Katherine Fogertey—Goldman Sachs

Low Stress Bets

Related Episodes

557: Don’t Fall in the Dividend Trap

549: Why Catastrophe Bonds Are Yielding 12%, and Should You Invest?

544: Sports Betting Is Not Investing

Article: Tail Events and Tail Risk

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Bad actors will use AI to disrupt the financial system, transportation networks, and utilities. We should prepare now for this inevitability. We share how in this episode. We also explain why the bull market in gold will likely continue.

Topics covered include:

• Why the OpenAI agentic AI breach is so disturbing
• How do we prepare for cyberattacks
• Why gold should be one of the assets we hold apart from the financial system
• How the historical relationship between gold and real interest rates has broken down
• To what extent are central banks selling dollars to buy gold
• How gold ETF flows influence the gold price

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Show Notes

Episode 564 Slide Deck with Charts

Gold's Run Isn't Yet Done - Bhanu Baweja - Financial Times

Brief independent investigation of agents’ behavior, reasoning and collaboration in the OpenAI / Hugging Face hacking incident

Are Central Banks Moving Out of Dollar Assets? - Linda S. Goldberg, Oliver Hannaoui, and Sneha Parthasarathy - Federal Reserve Bank of New York

Related Episodes

541: Debasement Fears or Meme Fever? What’s Driving the Gold and Silver Rally

563: Why Interest Rates Keep Rising and What to Do About It

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The national debt exceeds $40 trillion, U.S. long-term Treasury yields are at 19-year highs, the U.S. Treasury Department is intervening in currency and bond markets. We unpack it all in this episode and show you how to position your investment portfolio to lock in higher yields and protect yourself from falling bond prices.

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Show Notes

Episode 563 Slide Deck

Debt to the Penny - U.S. Treasury

Historical debt and budget tables - U.S. White House

Average U.S. national debt interest rate - U.S. Treasury

Treasury Announces Increased Sizes of Nominal Long-End Liquidity Support Buybacks Beginning September 9 - U.S Treasury

America’s Risky Debt: What Markets See That Policymakers Don’t - Hanno Lustig

Related Episodes

525: No More AAA – What the U.S. Debt Downgrade Means for Investors

463: How to Lock in Higher Yields

464: More Ways to Lock in Higher Yields

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What are the steps to simplify your portfolio, given that it is likely spread across multiple accounts? We focus particularly on retirees, who have to weigh additional considerations like withdrawals, Roth conversions, and required minimum distributions.

We also explore which areas of the stock and bond markets are attractive right now as you seek to simplify and/or rebalance your portfolio.

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Show Notes and Related Content

A Complete Guide to Investing in I Bonds and TIPS (2026)

550: Asset Location: Where You Invest, Where You Live, What You Can Access

Free Investment Strategy Report

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We explore the expected size of AI-related debt, which vehicles hold it, what could go wrong, and how to protect yourself.

Topics covered include:

• How AI capex boom compares to other large booms and busts
• What fixed income vehicles hold AI-linked debt
• What mechanisms are being used to transfer AI-debt risk.
• How circular finance is contributing to the AI infrastructure buildout
• What could go wrong with the AI infrastructure buildout that could lead to losses on AI-related debt
• How to tell what exposure you have to AI debt

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Show Notes

AI debt slide deck used for episode

RBC Weighs $2 Billion Risk Transfer to Hedge Data Center-Linked Loans by Esteban Duarte and Paula Sambo—Bloomberg

Hyperscalers Tap External Financing as AI Capex Outruns Cash Flow—FactSet Insight

What History Tells Us About The AI Investment Boom by Larry Swedroe—Financial Advisor

Goldman Sachs Warns on AI’s Debt Tsunami — Is This the End of the AI Boom? by Rich Duprey—Yahoo! Finance

Progress and peril by Pablo Hernández de Cos—BIS

The Opportunities and Risks AI Presents for the Economy and Financial System by Governor Lisa D. Cook—The Federal Reserve

Financial Stability Report by The Board of Governors of the Federal Reserve System—The Federal Reserve

Financing the AI infrastructure boom: on- and off-balance sheet borrowing by Egemen Eren, Ingomar Krohn and Karamfil Todorov—BIS

How AI debt financing impacts duration supply and interest rates by Hugo De Vere, Srini Ramaswamy and Seth Searls—Federal Reserve Bank of Dallas

US Life Insurers Held $807 Billion of Hard-to-Sell Credit by Alexandre Rajbhandari—Bloomberg

Insurers are funding AI infrastructure – NAIC wants to know if the ratings hold up by Paul Lucas—Insurance Business

US Corporate Bonds Statistics—sifma

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How inflation numbers are manipulated to appear lower. How to change your mindset about inflation to get ahead of it.

Topics covered include:

• How Inflation (PCE) Calculations Are Changing
• Why the CPE Changes Are Suspicious
• The Biggest Changes Ever to Inflation Calculations
• What Causes Inflation
• AI Buildout Is Boosting Inflation
• How Rising Income Can Overcome Inflation
• Inflation Is Currency Debasement
• Most Things Get Cheaper and Better Over Time
• Personal Inflation Rate and Retirement
• We Can Beat Inflation by Improving Our Skills
• Inflation Manipulation vs Inflation Fabrication
• How to Outsmart Inflation

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Show Notes

Preview of the 2026 Annual Update of the National Economic Accounts—BEA

The Inflation Outlook by Governor Stephen I. Miran—U.S. Federal Reserve

Toward A More Accurate Measure Of The Cost Of Living by The Advisory Commission To Study The Consumer Price Index —SSA

A Complete Guide to Understanding and Protecting Against Inflation by David Stein—Money for the Rest of Us

Live Retirement Portfolio Cohort—Money for the Rest of Us

Related Episodes

475: Inflation’s Illusion: Debunking the Normalcy of Currency Debasement

429: Which Inflation Protection Strategies Worked and Which Didn’t?

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David shares nine lessons a listener followed to become a millionaire.

Topics covered include:

• The benefit of underspending on housing
• What rate of return and how much would you need to save to grow a portfolio to one million dollars
• Why historical studies of the S&P 500 returns are misleading
• David's recent portfolio mistake

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Related Episodes

498: What I Learned Investing in the Past Decade

454: How To Invest – Ten Rules of Thumb for Individual Investors

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SpaceX, Anthropic, and OpenAI are all going public. Why now? And what will their weight be in index funds? What other U.S. ETF options are there if you don't want to have such a high concentration in stocks tied to AI. And finally, if you do buy SpaceX, what would need to happen to earn a reasonable return on your investment?

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Show Notes

Space Exploration Technologies Corp. Form S-1 Registration Statment Under the Securities Act of 1933—SEC

Elon Musk Is Dropping a Boulder in a Kiddie Pool by Matteo Wong—The Atlantic

Passive Aggressive: The Risks of Passive Investing Dominance by Chris Brightman and Campbell R. Harvey—SSRN

Passive Investing and Market Quality by Philipp Höfler, Christian Schlag, and Maik Schmeling—SSRN

Investments Mentioned

iShares Core S&P 500 ETF (IVV)

Tema S&P 500 Historical Weight ETF Strategy (DSPY)

Defiance Large Cap ex-Mag 7 (XMAG)

Invesco S&P 500 Equal Weight (RSP)

Invesco FTSE RAFI US 1000 (PRF)

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We explore the free dividend fallacy and how it applies to option income strategies. We break down the return drivers of covered call ETFs and examine the long-term performance record and volatility. Finally, we explain why it's better to own a single stock than a single-stock covered call ETF, such as MSTY, NVDY, or TSLY, offered by YieldMax.

Show Notes

The Dividend Disconnect - Samuel M. Hartzmark and David H. Solomon

Sam Hartzmark on Dividends - Meb Faber Research

The New American Hustle: Dividends Over Day Jobs - Denitsa Tsekova and Vildana Hajric - Bloomberg

Covered Calls Uncovered - Roni Israelov and Lars N. Nielsen - Financial Analysts Journal

Volatility Risk Premiums Embedded in Individual Equity Options: Some New Insights - Nikunj Kapadia and Gurdip singh Bakshi

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Investment Mentioned

Invesco S&P 500 BuyWrite ETF (PBP)

JPMorgan Equity Premium Income ETF (JEPI)

WisdomTree Equity Premium Income Fund (WTPI)

YieldMax TSLA Option Income Strategy ETF (TSLY)

Tesla (TSLA)

YieldMax NVDA Option Income Strategy ETF (NVDY)

NVIDIA (NVDA )

YieldMax MSTR Option Income Strategy ETF (MSTY)

Strategy (MSTR)

Related Episodes

471: Unlocking Income—A Comprehensive Guide to Investing in Covered Call ETFs

466: Does Dividend Investing Still Work?

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Why we have to navigate investing, business, and life with a compass rather than a GPS. David also provides an update on what he has learned from hosting live portfolio cohorts and letting AI analyze his portfolio trades over the past 12 years.

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Show Notes

Almost Reckless by Amy Smilovic—Penguin Random House

Related Episodes

555: Five Practices That Have Shaped My Career

127: Investing Is Wayfinding

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I share five business practices that have carried me through asset bubbles, financial crises, business pivots, and now the rise of AI.

Topics covered include:

• Recommended note-taking app and practices
• Recommended periodicals
• How to get better ideas
• Why we need to understand the probabilities when pursuing a new course
• The latest insights on AI, prediction markets, and other topics

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Show Notes

Researchers Asked LLMs for Strategic Advice. They Got “Trendslop” in Return. By Angelo Romasanta, Llewellyn D.W. Thomas and Natalia Levina—Harvard Business Review

Paul Kedrosky

Gregor Macdonald - Cold Eye Earth

Prediction Market Accuracy: Crowd Wisdom or Informed Minority? By Roberto Gomez Cram, Yunhan Guo, Theis Ingerslev Jensen, and Howard Kung

U.S. Soldier Charged With Using Classified Information To Profit From Prediction Market Bets—Office of Public Affairs, U.S. Department of Justice

64% of business books are profitable. That’s the bottom line from our study of Business Book ROI.—Josh Bernoff

Libsyn Statistics, visualized—Livewire Labs

The Big Bang: A.I. Has Created a Code Overload By Mike Isaac and Erin Griffith—The New York Times

High earners race ahead on AI as workplace divide widens By Madhumita Murgia and John Burn-Murdoch—Financial Times

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496: Are You Taking Enough Aspirational Risk?

535: Six Principles for Thriving Under Uncertainty and How Big Tech Is Doing the Opposite

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Please attend our live webinar on portfolio construction and rebalancing scheduled for Thursday, April 30th, at 12PM Eastern, 9AM Pacific time. I will cover the five steps to constructing and rebalancing a portfolio. I will also answer your questions.

You can sign up for this special webinar at https://moneyfortherestofus.com/webinar/

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Why portfolio construction is messy, personal, and never perfect. We compare the pros and cons of several portfolio strategies, including target-date funds, risk parity, and role-based portfolios. We conclude with three AI-related fallacies that will help us better navigate the current moment.

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Show Notes

Money for the Rest of Us Live Portfolio Cohorts

Why Everything Suddenly Is ‘Perfect’ by Paula Marantz Cohen—The Wall Street Journal

Your Perfect Portfolio by Cullen Roche—Pan MacMillan

My Core Investment Values by Peter Lazaroff—Peter Lazaroff

Show Us Your Portfolio: Jared Dillian—Excess Returns: An Investing Podcast

The dystopian fantasy of uselessness by Stephen Cane—The Financial Times

Investments Mentioned

State Street Bridgewater All Weather ETF (ALLW)

RPAR Risk Parity ETF (RPAR)

AQR Multi-Asset Fund (AQRIX)

Related Episodes

491: The Five Layers of Investing

306: Three Approaches to Asset Allocation

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In this mini episode, I share some examples of how I am using Claude Cowork and other tools to boost my productivity and build investment portfolio analysis tools. I also share more details on the live portfolio cohorts we will be holding next month.

You can learn more about our live portfolio cohorts here.

Show Notes

I Saw Something New in San Francisco - Ezra Klein - New York Times

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How the Iran conflict and other developments could lead to another major financial crisis. What is different today from 2008? Why trying to seed a revolution is so risky. And finally, what can we do to prepare ourselves for the next financial crisis?

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Show Notes

Read Trump's full statement on Iran attacks—PBS News

I Predicted the 2008 Financial Crisis. What Is Coming May Be Worse. By Richard Bookstaber—The New York Times

The End of Theory: Financial Crises, the Failure of Economics, and the Sweep of Human Interaction By Richard Bookstaber

The Poverty of Historicism By Karl Popper

Iran Is Trying to Defeat America in the Living Room By Karim Sadjadpour—The Atlantic

Iran war is the greatest threat to global energy ‘in history’, warns IEA By Malcom Moore—Financial Times

‘Once and for All’ Means Never By Thomas L. Friedman—The New York Times

AI Isn’t Coming for Everyone’s Job By Adam Ozimek—The Atlantic

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377: What If It’s Different This Time?

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When is good enough actually good enough? AI is reshaping how I work and live. And a member with a portfolio that's beaten an all-in-one Vanguard LifeStrategy fund for ten years asks whether the complexity is worth it — or whether it's time to simplify.

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Show Notes

The Upswing: How We Came Together a Century Ago and How We Can Do It Again by Robert Putnam—Simon &Schuster

An update on our model deprecation commitments for Claude Opus 3—Anthropic

Claude's Corner—Substack

Investments Mentioned

Vanguard LifeStrategy Growth Fund Investor (VASGX)

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