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Matt Krantz: Yield-Chasing Investors Are ‘Asking for a World of Hurt’

An author and longtime investing columnist on the role of individual stocks in a diversified portfolio, the virtues of ETFs, and the biggest mistakes he sees individual investors making.

Image featuring Christine Benz, host of The Longview podcast

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Our guest on the podcast today is author and columnist, Matt Krantz. He is the personal finance and management editor at Investor’s Business Daily. Prior to joining IBD, Matt was a senior financial writer for Capital Group. He was also a personal finance writer and reporter at USA Today for nearly 18 years. Matt is also the author of several books, including Fundamental Investing for Dummies, Online Investing for Dummies, and Retirement Planning for Dummies.

Background

Bio

Investor’s Business Daily

Fundamental Analysis for Dummies, by Matt Krantz

Online Investing for Dummies, by Matt Krantz

Retirement Planning for Dummies, by Matt Krantz

Work at IBD

CANSLIM Explained: What It Is and How It Works,” by James Chen, Investopedia.com, April 2, 2024.

Investors/Strategies

Feisty Rivals Take on Eli Lilly, Novo Nordisk on Weight Loss,” by Matt Krantz, investors.com, March 19, 2024.

How to Make Money on Nvidia—And Take Much Less Risk,” by Matt Krantz, investors.com, March 14, 2024.

Other

How to Make Money in Stocks: A Winning System in Good Times or Bad, by William O’Neil

The Four Pillars of Investing: Lessons for Building a Winning Portfolio, by William Bernstein

The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risks, by William Bernstein

Bernstein: ‘I Don’t Think the System Needs Nudges. I Think the System Needs Dynamite,’” The Long View podcast, Morningstar.com, May 7, 2019.

Bill Bernstein: We’re Starting to See all of the Signs of a Bubble,” The Long View podcast, Morningstar.com, March 9, 2021.

Bill Bernstein: Revisiting ‘The Four Pillars of Investing,’” The Long View podcast, Morningstar.com, July 11, 2023.

Quicken

Thinkorswim

Transcript

Christine Benz: Hi, and welcome to The Long View. I’m Christine Benz, director of personal finance and retirement planning for Morningstar.

Amy Arnott: And I’m Amy Arnott, portfolio strategist for Morningstar.

Benz: Our guest on the podcast today is author and columnist, Matt Krantz. He is the personal finance and management editor at Investor’s Business Daily. Prior to joining IBD, Matt was a senior financial writer for Capital Group. He was also a personal finance writer and reporter at USA Today for nearly 18 years. Matt is also the author of several books, including Fundamental Investing for Dummies, Online Investing for Dummies, and Retirement Planning for Dummies.

Matt, welcome to The Long View.

Matt Krantz: Thanks for having me.

Benz: Well, thanks for being here. I’ve admired your work for a long time. I want to start by talking about your personal journey and how you ended up writing about investing.

Krantz: I went to Miami University in Oxford, Ohio, and I was a business major. I always worked on the college paper, and I always really enjoyed journalism. So, it dawned on me why not just blend them? It was funny because I was working at the Daily Herald, which is north of Chicago. I was working in Chicago at Ernst & Young, which is an accounting firm. And the editor in chief from Investor’s Business Daily was coming to Chicago. And it was such an exciting opportunity. We met at—Michael Jordan had a restaurant in Chicago.

Arnott: Oh yeah, that was back in the ‘90s, I think.

Krantz: And it was great. So, I met with him, and we had a great lunch, and it worked out. And he’s like, “Come and join us.” So, I moved out to LA and met William O’Neil, and it was great because I was finally able to bring together journalism and business. And it was such an exciting time to be at Investor’s Business Daily.

Arnott: Can you talk about a book or an individual that was especially influential in shaping how you think about investing?

Krantz: Yeah, a couple. I read all the time. So, I’m constantly reading things. But a couple that come to mind would be, well, O’Neil, of course. He was the founder of Investor’s Business Daily. He’s no longer with us, sadly. But he wrote a book called How to Make Money in Stocks. And at the time, it was very old sacrilege. His idea was, you don’t need to get so wrapped up about how high a P/E is. You can think about it if you want to. But stocks that go up, go higher up, they keep going up. And people thought he was nuts because at the time, everything was about value. And if you pay too much, you’re going to get burned. But as we see with, like today, it’s a great example. People who thought that Nvidia was too expensive three years ago missed one of the greatest bull market runs in history. Same goes with Apple and Tesla. Winning stocks do tend to keep going up. And granted, you have to know when to sell them, too. And he covers that in his book. But I thought that was pretty amazing, how an idea that he had that seemed to be so crazy at the time now is kind of mainstream.

Another book that I really enjoyed is The Four Pillars of Investing, which is on the opposite side. That’s by William Bernstein. In this book, he talks a lot about building a portfolio and managing your risk and trying to get the most optimal returns for the amount of risks that you’ve taken on. So those two books are very different, but I think they both tell a complete picture of how to make money in markets.

Arnott: We’re big fans of Bill Bernstein at Morningstar. And I think he’s been on the podcast, Christine?

Benz: Yes, I believe three times. He was our first guest, and we’ve had him on a couple of times subsequently.

Krantz: He also has a book called The Intelligent Asset Allocator, which is a little more techy. But those two books together I think they’re just masterpieces.

Benz: We wanted to follow up on the O’Neil strategy. Do you think it’s safe to shorthand that as a momentum strategy?

Krantz: I think that might be a little simplistic because you can buy ETFs that have momentum factors to them. And that’s part of it. I think people like to say that because that’s part of it. But a lot of these momentum factor ETFs don’t pay a lot of attention to fundamentals. I think that’s where people get caught by O’Neil’s strategy is he doesn’t just jump into a stock that’s going up; it has to have the fundamentals, too. So, the William O’Neil strategy skipped out on that whole meme stock thing because those stocks did not have the fundamentals to back it up. So, I think that’s part of it, but that’s not the whole strategy.

Arnott: If we look at IBD’s strategy and the things that Bill O’Neil was looking for, he was looking at things like strong earnings growth over the most recent quarter and the most recent year. But also, things like profitability, revenue growth, high returns on equity, as well as some more momentum-oriented factors?

Krantz: So we have these charts that people can get through our subscription services, and it outlines all these indicators that are important. And we look at what the institutions are doing. We look at relative strength versus other stocks. So, there’s various inputs that go into it, but it’s not just simply that the stocks go up a lot.

Benz: One thing I’ve sometimes heard about IBD is a criticism that it creates this dependency. Like if you buy into this philosophy, will you also need us on an ongoing basis to tell you what to do. Because the strategy isn’t super simple to implement as far as I understand it. Can you talk about that, Matt?

Krantz: I guess that could be said about any kind of subscription, right? So, like I love music and I subscribe to Spotify. Am I dependent on Spotify? Maybe. I know when I’m having a tough day in the morning and I need to get going, I really need to turn on that high-energy mix to get me going. So, I guess, in a way. And I think even like with Morningstar, it’s a subscription service that’s worth its weight in gold. And I have never, ever met someone from a mutual fund or a financial advisor who said that I don’t get enormous value out of my Morningstar subscription and Morningstar Direct. Those tools are just so valuable. So, I guess one way of saying dependent on something is, and it’s just another way of saying it’s valuable and it’s worth. I think if you’re into music, the subscription of Spotify is worth it. There may be alternatives, I don’t know, but Spotify for me is a good value and it delivers. And I think that’s kind of the case with our subscribers with IBD.

Arnott: I’m totally dependent on Spotify now. I basically can’t write unless I’m listening to music, which can be good or bad, I guess.

A lot of people will probably be familiar with your work at USA TODAY, where you were a reporter for about 18 years. Was it a difficult transition for you to go from writing for that audience to Investor’s Business Daily, which seems to be more geared toward investment junkies who are more active traders?

Krantz: Well, so what happened is I went to college, and I landed my job, my first journalism job, my first real job really—I was hired out of Ernst & Young, but I wasn’t there that long. So, I was writing for hardcore investors and what happened was USA TODAY—this was 1999—was like, wait a second, there’s a lot of interest in people buying individual stocks. It’s not just mutual funds anymore, because they had a great columnist that wrote about mutual funds in 401(k). So, they’re like, well, where can we get some people who know about investing in individual stocks? So, they brought me over to help build that part of the business at the time that individual investors were keenly interested in buying individual stocks. So, in a way, I was carrying over some of the things I learned at IBD over to USA Today.

Benz: I want to talk about educating people about stock-picking and fundamental analysis. I’ve seen you present, I think it was maybe in front of an AAII group, and I thought you just did such a fantastic job explaining things. But maybe you can talk about the case for individual investors, especially, being invested in a basket of individual stocks versus just picking an ETF or a fund. Can you talk about how you educate around that idea?

Krantz: Really it comes down to people’s willingness to put in the time and their expectations and their skill. So, I would say for most people with just a 401(k) or a retirement plan, doesn’t have a lot of time, doesn’t have a lot of interest, doesn’t really care if they beat the market or not. You’re made to order for mutual funds and ETFs. There’s just no doubt. You just buy those things, low-cost, high-quality, use the Morningstar rankings that are available—those are awesome—and just put it away and forget about it. But if you are interested, if you did find yourself reading how to make money in stocks, or you want to get a better return, or you think you can get a better return, or you have knowledge of the markets, then I don’t see any harm in moving in that direction and see how you do. Most people don’t track their performance, which is a shame, and the brokers don’t do an amazing job at that. But if you maybe start with the baby step and maybe put 10% of your portfolio in individual stocks and see how you do. And if you do great, then you might want to do more of it. If you don’t do great, it might be a lesson for you to say, stick with the ETFs and the mutual funds.

Arnott: Another suggestion that I think is helpful is before you buy the stock, get a notebook and write down your rationale for buying it, and then that’s a way of holding yourself accountable. You can go back and see if you were right or not. And I think that can also be a learning exercise for investors over time.

Krantz: Absolutely. And some of the brokers—I think TD Ameritrade, which is being absorbed into Schwab, they have this paper-trading thing. I don’t know if they still do, but you can find these paper-trading broker offerings that help you really test and see how you’re doing, which I think is really a good exercise.

Arnott: When it comes to your own portfolio, do you use individual stocks or are there areas where you use mutual funds or ETFs instead?

Krantz: I’m kind of unusual, and I’ve been used to this since I’ve been in this business. We’re highly—I don’t think regulated is the right word—but we have these strong internal rules that we can’t do certain things with trading. And this is so complicated for me that I just buy mutual funds and that’s just what I do. So, I remember when I was at USA TODAY, I wanted to write a story about Nike, and I couldn’t because I owned it. And at that point, I’m like, you know, Matt, this is not worth it. This is interfering with your job. Just buy index mutual funds and just do your job.

Benz: I wanted to ask about that index versus active question with your portfolio. Sounds like you’re an indexer. How does that square with your day job of helping people pick individual stocks? If you think that index funds are maybe better than active, aren’t active stock portfolios active too, or very active?

Krantz: My rationale is mainly because I don’t want to buy a stock that I write about. So, for me, that makes a lot of sense. Plus, we do a lot of profiles of mutual fund managers, so I wouldn’t want anyone to think that I’m only profiling this manager because I own the mutual fund that he or she runs.

With that said, you guys publish the data; S&P publishes the data. The track record for active is not great. After fees, very few, if any, can beat the market on a consistent basis. I think that’s been proven out. If you look at the flows—and you guys write about this all the time in a really, really smart way—I think the flows are just pouring into passive because I think people are understanding that a lot of these mutual funds are like sitting ducks and they have to hold these stocks and they can’t move to cash when they should. They have so many disadvantages over time versus the low fees that you can get from the index funds.

Arnott: So, related to the popularity of index funds, one criticism that has come up is that you have this handful of large tech companies that have been driving so much of the market gains. And as a result, those handful of companies have become bigger and bigger positions in most of the major market indexes. Is that something that you’re concerned about at all?

Krantz: We look at it, and it’s higher than it has been. It’s not as high as it’s always been. I think a lot of people think that the S&P 500 is set in stone, and it doesn’t change when in fact it’s constantly changing. Super microcomputer is coming out of nowhere and is being added. So, I think the thing to that is that the index is dynamic and it’s evolving. And so, I think that eventually you’re going to see other companies come in and fill in the gaps. So, Apple— everyone was worried that Apple would fade, and it has. This year it’s down about 10%. But as it’s fading, Nvidia comes out of nowhere and Berkshire Hathaway and Eli Lilly. So, I think that over time our economy is so evolving and dynamic that those things kind of work themselves out. I don’t get too concerned about it yet.

Benz: We want to spend some more time talking about the current market environment. But first we just want to go over your approach to picking stocks, how you think people should go about picking stocks. You’re a big believer in fundamental analysis and you wrote the Fundamental Analysis for Dummies book. So, if someone is focusing on picking stocks based on fundamentals, what are the key ones that you think they should home in on?

Krantz: I think growth is really important. You want to look at earnings growth and revenue growth. You want to compare GAAP earnings to adjusted earnings. You don’t want to see those get too far apart. Return on equity is a great measure to see how the management is performing. There’s just a laundry list of things that you can look at that. Those are the big ones, of course. And then with the timing, you want to make sure you’re not buying stocks when we call them extended, which is when they’re basically straight up in the sky. Because a lot of times those do pull back and it’s better to wait until they consolidate. So, you combine the chart action with the fundamentals to pick the best possible time to get in.

Arnott: You mentioned the chart action and I know that Investor’s Business Daily puts a lot of emphasis on technical analysis. Do you look at technicals yourself, and are there any metrics that you think are especially helpful?

Krantz: I’m the editor of personal finance. So, I’m mainly writing for people who buy ETFs and mutual funds. And while you can try that chart action with ETFs especially, for the people that I’m writing for, that’s not really what they’re trying to do. They’re just trying to pick out great funds and hold on to them and build diversified portfolios. So, for my corner of the world, that’s not as important. But we do have, as you pointed out, a lot of our writers spend a lot of time on that. And if you visit our website and read any of the articles, they will talk about the technical levels that they’re looking at. But for my corner of the publication, we look mostly at broader sector themes and whatnot.

Benz: How much attention do you think investors should pay to what’s going on with the broad economy, whether the direction of interest rates or recession, and so on? It seems like interest rates have been super influential in the markets’ movements over the past couple of years. Can you talk about how big a role they should play and how investors approach their portfolios?

Krantz: I think it’s one of these things where it’s important to watch it and know what’s going on. Just like you would in, say, when you listen to the radio in the morning just to know what’s going on in the world, just to be an educated investor, but I also think you have to have some modesty and some reality in that. I don’t think I’ve met anyone that’s reliably predicted interest-rate changes in my life. And even if they did, it’s so random the way the markets can react to changes. There was a time when unemployment started rising, the stock market started rising because people thought, I don’t even know—bad news is good news or whatever. So, I think it’s important to monitor it, but don’t put too much precedence on it in your portfolio because the odds of you being able to cash in wisely at the right time is not great.

Arnott: I think even a lot of professional investors were caught off guard by inflation being much higher than anyone expected so quickly and then cooling off, and interest rates have been tricky too for professional investors.

Krantz: It’s really hard because news is random, and we don’t know what’s going to come out day to day. And to try to convert that into a gain ahead of time is really tough.

Arnott: We know a lot of individual investors who put a lot of emphasis on dividend-paying stocks as a way of creating cash flows for retirement. Is that a good strategy in your opinion?

Krantz: OK, that’s a tough one. That’s a great question. So, a couple of answers to that. So, I do think that people don’t pay enough attention to dividends. They account for about a third of the markets’ total return over time. That’s a powerful force. And what’s also great about them is in that down year, usually your only source of any kind of return at all is a dividend. So, in that way, it offers some buffer. And I love it when my index mutual funds pay dividends because it’s reassuring and it’s this nice kind of return when everything else is going wrong.

With that said, I’ve seen absolute horror stories of people chasing yield. Pacific Gas and Electric, is just makes me want to just cry. People were chasing that—I think it had a double-digit dividend yield, and it’s from a utility in Northern California. Well, that’s like money in the bank. How could you not score on that? And it was a complete disaster. And that happens actually more times than you think. I can’t think of any other examples off the top of my head, but it’s actually fairly common. So, I think that dividends are awesome long term. And if you have a diversified basket of dividend-paying stocks, and you can get those in ETFs and mutual funds, I think it can work out all right. But if you start chasing yield, you’re just asking for a world of hurt.

Benz: Earlier, Matt, you mentioned that a good starting point for investors who might want to dabble in individual stocks is just start building a small portfolio. One thing I see sometimes in investors’ portfolios is that they have this basket of stocks that really duplicates what’s in their mutual funds. And oftentimes they’ve doubled down on the most expensive stocks in the mutual funds, so you might see Apple and Nvidia and so forth. Do you see that problem? And how do you caution investors to not run into that?

Krantz: That’s actually pretty common. I think people like to own certain stocks. So, when I walk around the block at my house or around the office and you just talk to people and they all want to brag about how they own Nvidia, they all want to brag about how they owned Apple whenever when the iPhone came out. So, I think that’s human nature. I don’t really see it as a problem unless they hold these things too long and they’re getting killed on them when they crash. And I don’t really see a problem unless it becomes ridiculously overweighted, which most people when they say they own a lot of something, they actually really don’t. They might own like 100 shares, and they’re like, “Oh, I’m loaded up to the gills.” I think it’s a bragging thing.

Arnott: Yeah, more like bragging, I was going to say.

Krantz: I think that’s what it is. Because when I actually see people’s portfolios, it’s a lot more timid than they try to indicate usually.

Arnott: In addition to stocks, what other building blocks do you think belong in most investors’ portfolios?

Krantz: I’m a huge fan of ETFs. I think those are just things of beauty. They’re just incredible. The costs are low. They’re easy to trade. You don’t have to open accounts with a zillion different mutual fund companies. You can get pretty much any flavor you want. You can play it straight with S&P 500, superlow cost, or you can specialize a little bit. I was surprised to see that the QQQ that just turned 10 years old has outperformed just about every other major US diversified, and that’s according to Morningstar Direct, and that is incredible. And that’s an easy ETF to buy—it has high liquidity, low spreads. It doesn’t get any better than that. So, I think ETFs should be really a big piece of most people’s portfolio.

Benz: How about at the asset class level? Are there categories like fixed income, for example? If I have an equity portfolio, what other asset classes should belong in my portfolio?

Krantz: That’s a tough one. I think if you read the textbooks and you read the Nobel Laureate work and the modern portfolio theory, you should have S&P 500 large growth, you should have large value, small value, value, small, international, emerging—trying to think if I’m forgetting— bond. The textbook says that. And it makes sense when you run the math and you look at the correlation between the asset classes and you can lower your risk and you get on that efficient frontier, and it’s all gravy. But in reality, it’s so hard because it hasn’t worked out that way at all. Large growth has completely dominated. So, I think my advice to people is to have the diversified portfolio with a different small, large, value, growth, blend, international, emerging, bond. But I do take it with a grain of salt because that strategy has not really worked for a long time—15, 20 years.

Arnott: International, I think, is another great example of that where the theory is you should diversify and have maybe at least a third of your assets outside of the US. But if you did that, it’s pretty much been a huge drag on your returns over the past 15 years or so. What’s your take on that? Do you think that the benefit of international diversification is overrated, or is it still worth having a non-US allocation to stocks?

Krantz: That is a great question. And I’ve been thinking about that a lot. My own portfolio, I do have a complete spread. So, I’ve got value, I’ve got international, I’ve got emerging. But I do have to be really patient. All the statistics and the studies that find that these asset classes have value usually run back to the early 1900s. I think they call it recency bias—recently only large-cap growth has worked. Jack Bogle always made the case, I’ll never forget. He used to really take issue with this whole idea of owning eight or nine asset classes. He’s like, all you need is the S&P 500 and a bond index. And I think if that’s your strategy and you stick with it, I think it’s going to be OK. But if you’re going to want a broader diversification, I think it’s probably better. But you have to be even more patient because you can go 20, 30 years before some of these asset classes do anything. So, I think that it comes down to patience. But with that said, I don’t have a problem with people that just buy an S&P 500 and a bond index. That’s what Bogle always told people to do.

Arnott: So, all the headlines about the 60/40 portfolio being dead, do you think that’s a little overdone?

Krantz: I think that is. That was really due to one bad year or two bad years. Over time, that portfolio does fine. I do think that it may be a little bit too conservative for more people. I’ve met someone who was in their 20s and he had a 60/40 portfolio. To me, that’s playing it a little bit too safe. I think that’s another thing that people can do a lot is they play it too safe. They avoid as much risk as possible. And I think that’s a real shame to see, especially when you have time on your side when you’re only 20 and you don’t need the money for another 40, 50, 60 years, that’s your chance to take some risk. And those returns early on can really pay off later when you then can afford to dial back your risk.

Benz: One thing I’ve been wondering about international is whether it’s an indirect value play in a way in that the sector composition of non-US indexes is pretty different from the US market today. Have you thought about that, Matt, thought about how rebalancing into international potentially gets you a little bit more exposure to value in some areas that have just not performed especially well?

Krantz: I think the really great example that is Novo Nordisk with their miracle weight loss drug. It’s now the most valuable company in Europe. That’s a healthcare play. That’s a stock that no one even cared about before. So that would be like your ultimate value play. With that said, man, international has just been so moribund for so long. But I guess it does go with the value. That’s a really good point. I wouldn’t mind looking at that some more, but I think you’re right on that.

Arnott: We also wanted to circle back to the current market environment and talk about some of the trends you’re seeing there. So, looking at what’s been driving the market lately, if you look at the technology sector, I think it’s up about 60% over the past 12 months. Does that worry you at all? Or does it remind you of the tech bubble in the late 1990s when I think you were writing about investing back in 1999?

Krantz: Another great question. I think there’s similarities, but it’s different. And people always say it’s different this time. So, I’m going to have fun with that. But I think it is different this time. But you have to remember back in 1999, at USA Today we had this index called the USA TODAY Internet 100 Index, and we actually had 100 internet companies. And the only ones you would have heard of would be like Amazon. There used to be eToys. There used to be a website that was publicly traded that only sold toys. It was just crazy.

Arnott: Like Pets.com I think was another…

Krantz: Pets.com, that’s another classic. So, we looked at it. And what happened was the business models actually didn’t work. So, they were losing money. They had no margins. They had no return on equity. Some of them didn’t even have revenue. But compare that to today. We were talking about companies that have made more profit than any other companies in the history of the country. And they have nothing really stopping them. There’s no one in the way of Nvidia right now. They’re so far advanced in their AI chips and their bitcoin chips. It’s just amazing. These are businesses that we’ve never really seen before. Totally different than the Pets.com. You have to remember when stocks go up, they have the component that’s tied to the fundamentals and then they have a part that’s tied to the speculation. So back in the ‘90s, it was all speculative return. And today, there’s some speculative return, but there’s a lot of fundamental return as well.

With that said, stocks can get overdone. There’s no question. It wouldn’t surprise me at all if some of these stocks come off. They always do. Look at Apple, right? Apple is way down. And there will be new entrants. There will be new competition. I think there’s a lot of exciting things with AI going on in Europe of all places, and that could be really interesting. But these companies are profit machines, and that is completely different than the ‘90s.

Benz: I wanted to ask about the AI area specifically, whether you think that’s a bubble. It sounds like you don’t. But how can investors protect themselves in case there is a downdraft in that area?

Krantz: To be fair, there will be a downdraft, just like with the internet. The internet was real. It revolutionized everything. We’re having this interview right now over a system that probably didn’t even exist, and it’s due to the internet. It just takes time, and it took a long time for businesses to figure out how to make money off the internet. It took a long time for companies to figure out how to integrate it. These things take a long time. That was the case with the railroad, too. It took a long time for companies to figure out how to implement these, or the typewriter, or all these things. So, there’s a lot of false starts, and there’s a lot of great ideas that never pan out, and there’s great ideas that become features instead of companies. So, there’s going to be enormous turnover, and there’s going to be heartbreak and pain, and there’s going to be all kinds of crashes and bubbles in AI, because it’s such an exciting thing.

But the fact of the matter is, AI is going to revolutionize things. It is so powerful. What I think is so amazing about it is with the internet, people had to kind of figure it out. They had to download their browser and do all that stuff. With AI, you could be just typing in a natural language query and have it generate an image for you or a video or an article. So, I think it’s going to have a huge impact. But with that said, I think it’s not going to be a slam-dunk for every investor.

Arnott: So related to that, we’ve been hearing from portfolio managers who manage small-cap funds or international or value that they think those areas are the most attractive they’ve been in a couple of decades. Do you think there’s anything to suggest that we might see a market rotation away from the US tech stocks that are driving the market and into some of those areas?

Krantz: People were telling me that last year, they were telling me that five years ago, and it still hasn’t happened. The fact that they’re saying that makes me think that we’re still not there yet. Usually, these rallies come out of nowhere. I can remember after the internet bubble burst in ‘99, commodities and emerging markets came on out of nowhere. No one was expecting it. No one owned it. They called them BRICS at the time. It was such a shock to everybody. And the same was with bitcoin, right? That came out of nowhere. So, I think once people stop saying that there’s going to be a recovery in small cap and value and international, that’s probably when it will happen, but I don’t think we’re there yet.

Benz: I wanted to ask about the role of passive funds in all of this. Passive fund flows, as you noted earlier, Matt, have been going heavily to just the broad market index products. And I guess I’m curious to get your take on whether that is driving some of the concentration in the Big Tech stocks because the index fund investors are just inherently valuation-insensitive—that they’re just buying the index, and so the index has to buy the stocks and that helps drive the stocks up. Have you thought about the interplay there?

Krantz: I’ve been meaning to look into that. I think that’s a really important question. I don’t know the answer. The indexes are market-cap weighted, so big gets bigger. But there’s also trading around it. So, I think people think that these stocks can only go up because the indexes are buying them. But if you look at Apple—we keep going back to that—it’s down 10%. And it’s getting bought like crazy by the same indexes that are buying Nvidia. So, we have to have a little bit of faith that the market structure that underlies all this stuff works and that the fundamentals do matter. And even if a company has terrible fundamentals, but it’s in an index, that stock is still going to go down. So, I think that’s the case. Whether or not Apple should be down 15%, I don’t know. But hopefully some academics will start taking a look at this because I think it’s a fascinating question.

Arnott: Another big market trend we’ve seen recently is the huge rebound in crypto and bitcoin—we’re taping this in the second week of March—it just crossed over $72,000. So, what’s your take on cryptocurrency? Have you added any to your own portfolio?

Krantz: I don’t buy it, but I do watch it, and I think everyone does. But a couple of things with that. So going back to the point where things rally when no one is expecting it a lot of times, that’s totally the case with bitcoin. I think if you ask most people, they think, “Oh yeah, bitcoin, didn’t that crash last year?” They don’t even know it’s come back. And that’s kind of how these things work. With that said, bitcoin didn’t do what it was supposed to do. It was supposed to be a form of store of value, which it totally failed at miserably. It didn’t do that. It was supposed to be an inflation hedge. It didn’t do that either. And it was supposed to be a form of payment. And it still hasn’t panned off for that. So, I think it’s really just a scarcity play. And that scares people. And I get that. It scares me. But if you think about it, what is gold? It’s just a rock. Some people don’t even think it’s that pretty. It’s just a rock that people dig out of the ground. The only reason it really has value and it’s had value for centuries is because of scarcity. So maybe bitcoin is going to be like playing the role of gold in some portfolios for some people. I don’t own gold either. But I think that might be what’s going on.

Benz: I know that’s been an assertion. I guess the counterpoint is, well, there are all these other cryptocurrencies, and I could create a cryptocurrency, right? So that to me diminishes the scarcity argument, doesn’t it?

Krantz: It does except, I think right now, why we saw bitcoin go parabolic was the fact it’s getting in a set of ETFs. I think there’s 11 of them and they’re all backed by big companies like iShares and whatnot. You don’t have that yet with the other cryptocurrencies. That’s going to change. I think ethereum is in the process of getting an ETF. I think what it does is it makes it more legit, and it makes it easier for people to put like 1% of their portfolio in it. You don’t have to open a wallet with some crazy crypto exchange. You just buy it through your brokerage account. And right now, bitcoin is the only one that has that. But I think once that broadens out, you could see some of these other cryptos doing pretty well as well with scarcity. With scarcity, I don’t know if that’s like a lasting investment thesis. It isn’t for me. Like I said, I don’t own gold either.

Arnott: We also wanted to talk about some of the other areas that you write about: financial planning, retirement planning. I think one topic you wrote about recently is the fact that there’s so much fear and discouragement about retirement savings. Can you talk a little bit more about that?

Krantz: It breaks my heart when I meet people and they’re like, “I’ll never be able to retire. I’ll never be able to. It’s not even going to happen.” It’s one thing that people don’t want to retire, but it breaks my heart when people think they can’t. Because the fact of the matter is you can, if you start early, and you do the right things. And it’s not that hard now to do the right things. I feel bad for people 23 years ago. There were no ETFs. Fees were sky high. You had to work for these expensive brokers who acted like they were advisors, but they’re really selling you product. That was tough. I’m sure things will get better, but we don’t really have those problems today. You can set up an account right now with very little effort, very little costs. If you don’t want to pick out your portfolio, you can get a robo-advisor to do it really cheaply. The key is to just get started. Don’t worry about the fact that you’re probably going to need to save a couple of million dollars. If you start now, you’ll be shocked at how quickly this is. Einstein has that famous quote, “compounding is the most powerful force in the universe.” And it’s totally true. If you just sit down with a spreadsheet and just run the numbers, you’ll be amazed at how much money you can make if you start as soon as you can, which I really hope people will do.

Benz: Are there other key pieces of advice in addition to getting started and sticking with it? Are there any other key things that you always tell investors when you’re doing educational sessions with them?

Krantz: I think we talked about it earlier is you have to be patient. There will be times when your portfolio is going to go against you and it’s going to go the wrong way. And it’s so easy to say, this is just not working and pull your money out. But I think people have to be patient and they have to pick a strategy. So, we talked about that as well. If you’re going to go with the multiple asset classes and international and emerging and all that, stick with it. Don’t keep switching it around. You don’t say, “Oh, well, large-cap growth is all that matters. I’m going to switch.” And then switch to that. Then you’ll inevitably see value will start rallying. So, you have to be patient. You have to be persistent. And I think if you start early enough, you’re going to get where you need to be.

Arnott: What’s your take on target-date funds? It seems like that’s a way that people can choose a fund that is appropriate for when they are planning to retire and then just set it and forget it.

Krantz: I’m on mixed mind on those. I love the simplicity and I think for a lot of people, they’re better than nothing. I think they make it look so simple. And I was looking at ICI numbers, I’m just shocked at how popular those are. Almost every plan offers them. I think a huge percentage of younger investors specifically use them. But what bums me out about them is I’ve been offered some in my life through 401(k) plans. Some of them are pretty darn lousy. I’ve seen some with huge fees, with terrible mixes, with either mixes that are too aggressive in my mind or way too conservative. I think a lot of people just buy them, and they don’t look at them, and they just assume that they’re OK. And in those cases, people would be better off not using them. If you’re not going to do anything and you do a target date, you’re better off. But if you were going to build a smart portfolio and you, just out of laziness, get the target date, then I think you might be doing yourself a disservice and you really, really need to take the time to look at what’s in those things.

Benz: I guess the good news is it does seem like fund flows are strongly favoring the good series. So, Vanguard series, Fidelity’s Index series, they have been getting the lion’s share of target-date fund assets as far as we can tell.

Krantz: Absolutely. And Morningstar does such a great job of tracking this. I love this one statistic that Morningstar puts out, talking about how the lowest-cost funds get the most flows, which really is encouraging to me because that makes me think that we’re getting through to people—at Morningstar, that you guys are really making an impact and people are listening to what you’re saying about fees matter. They matter a lot, especially over a long period of time. And I think most people, as your data shows, are paying attention.

Arnott: I think it is encouraging. And there was a period of time 20 or 30 years ago when we saw a lot of assets still invested in funds with high expense ratios or front-end loads, back-end loads. But that trend is definitely reversed. So, I think that’s a nice thing to see for investors.

Krantz: And Morningstar, you guys definitely deserve credit on that. You guys were on the Vanguard pointing out those high fees. So, hats off to you.

Arnott: Thank you. It’s been great to see the results. So, with retirement planning, if somebody is trying to figure out how much do I need to save to retire or what should my portfolio value be before I retire, is there any software or tools that you think are particularly helpful for individual investors trying to figure that out?

Krantz: Absolutely. I’m kind of old school, but I’m kind of glad about it now. I’m a diehard user of Quicken. And I know people are like, “oh, man, this guy, wow.” What does he also have a Model T? But I’ve never found a tool that’s as powerful as Quicken. It’s a little harder to learn. But once you learn it, it just gives you so much control. What I like about Quicken is two things. First of all, it tracks everything. It tracks your portfolio. It will tell you how you’re doing, which we talked about earlier. It will also tell you how much you need. It will tell you how much you’re spending. And it really makes it easy to figure that out. And you’re in control of your own data. So unlike Intuit, which decided to just close Mint, you don’t really have to worry about that with Quicken because the data is on your drive and you control it, which is really important.

The other tool I like is—I know this is maybe simplistic—but I love Vanguard’s retirement planning tool. I think it’s pretty smart. It gives you a really good idea of how you’re doing and whether or not you’re going to have the money to retire. It’s super simple to use. I think it’s a lot more sophisticated than it looks like on the front end. I think there’s a lot going on on the back end. And it just gives you a comfort level of where you’re at and if you’re saving enough. Those two tools together are pretty killer in my opinion.

Benz: I wanted to ask about investing online and online brokers. You’ve written a lot about this topic. You’ve written a book on this topic. Can you talk about how people should vet online brokers, where they should do their business and what are the key factors that should be on their dashboards?

Krantz: So that’s really a taste issue. Just for fun, I like opening accounts and just trying to kick in the tires. They make it really easy to do that. A lot of the brokers, you don’t even have to put money in them anymore. And I think that’s a really good way to try it. So, it’s like, if you buy a new bike, you want to try it out. Because even if you ask someone, do you like this bike or that bike, you have a different body shape, you peddle differently, you wear different shoes. So, you really don’t know until you actually ride it around the block a couple of times. I think the same goes for the brokers. Like I said, I’ve opened up accounts I never really funded, but I just opened them up to see what they were like. And I can tell which ones I like and which ones I prefer. I think that’s really the best way to do it.

Arnott: Are there any specific names that you would mention as standing out as being easier to use or having other good quality?

Krantz: I’ve been a longtime customer of TD Ameritrade. It just suited me. It just fit. And I’ve been with them for a long time. And they were always aggressive on fees. They were one of the first to go to zero, and they’ve been always aggressive and pushing down fees. They’re being pulled into Schwab. So that should be interesting to see how that goes. Schwab has said that they’re going to keep Thinkorswim, which is a great tool for more active investors. So, we’ll see how that goes. In terms of fun, I think Robinhood is just a lot of fun. I like opening the app. I don’t really have any money in it. I think I have $5 in there. But they do such a great job of making it like a video game and entertaining and colorful, and honestly joyful. I think they’ve had a huge impact on the industry. I’ve noticed ever since they came around, a lot of the brokers have done a better job of cleaning up their interfaces.

With that said, I think Vanguard is getting better. They’re so darn popular that I think they’re having some customer service issues. I think you guys have written about that. They’re just so popular. There’s some rough edges in their interface that you run into. You’re like, wow, this screen looks like it was just made a while ago. I think they’re improving and there’s new leadership there. So, we’ll see what happens there.

Arnott: What about robo-advisors? Have you opened any accounts to check those out?

Krantz: I did back when I first wrote one of my early editions of Investing Online for Dummies and I tried them out. But what I found lately is that that has become a feature. It used to be you’d have to open an account with like a Wealthfront or a Betterment to get that kind of capability. But now, you can just get that right through your existing broker, be that Vanguard or whoever else. So, I’m glad the pure plays are still in there. And I think they do get some edges for some people and they’re definitely worth looking at, and they do some things better. But for a lot of people that just want to go robo, they could just do it through their existing broker.

Arnott: So, when you say go robo, you mean having a prebuilt, diversified portfolio that’s appropriate for your risk tolerance and time horizon?

Krantz: Yeah. So, if you have an account say at Vanguard, they have different offerings now and you can push a button and you pay a fee. I can’t remember what it is, but they’ll build your portfolio for you. Or if you pay a little bit more, they’ll build your portfolio for you, and then you can consult with a live advisor, I’m pretty sure. So, I think you can get all that stuff right from the mainline brokers without going with these other ones. But that said, I don’t want to disparage the pure play robo-advisors. I think they do a good job, and in some cases, they’re superior choices. But you’d have to really look and see what your use case is.

Benz: Well, Matt, this has been such a great conversation. I know we’ve put you through your paces on a lot of different topics. Thank you so much for joining us today.

Krantz: Thanks for having me.

Arnott: Thanks again, Matt.

Benz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.

You can follow me on social media @Christine_Benz on X, or at Christine Benz on LinkedIn.

Arnott: And at Amy Arnott on LinkedIn.

Benz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.

Finally, we’d love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Authors

Christine Benz

Director
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Christine Benz is director of personal finance and retirement planning for Morningstar, Inc. In that role, she focuses on retirement and portfolio planning for individual investors. She also co-hosts a podcast for Morningstar, The Long View, which features in-depth interviews with thought leaders in investing and personal finance.

Benz joined Morningstar in 1993. Before assuming her current role she served as a mutual fund analyst and headed up Morningstar’s team of fund researchers in the U.S. She also served as editor of Morningstar Mutual Funds and Morningstar FundInvestor.

She is a frequent public speaker and is widely quoted in the media, including The New York Times, The Wall Street Journal, Barron’s, CNBC, and PBS. In 2020, Barron’s named her to its inaugural list of the 100 most influential women in finance; she appeared on the 2021 list as well. In 2021, Barron’s named her as one of the 10 most influential women in wealth management.

She holds a bachelor’s degree in political science and Russian language from the University of Illinois at Urbana-Champaign.

Amy C. Arnott, CFA

Portfolio Strategist
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Amy C. Arnott, CFA, is a portfolio strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. She is responsible for developing and articulating best practices to help investors and advisors build smarter portfolios.

Before rejoining Morningstar in 2019, Arnott was an Associate Wealth Advisor at Buckingham Strategic Wealth, where she was responsible for portfolio analysis, asset allocation, rebalancing, and trade recommendations. Arnott originally joined Morningstar as a mutual fund analyst in 1991 and held a variety of leadership roles in investment research, corporate finance, and strategy from 1991 to 2017.

Arnott holds a bachelor’s degree with honors in English and French from the University of Wisconsin – Madison. She also holds the Chartered Financial Analyst® designation.

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