1. without a password manager that is shared on all your devices, you WILL re-use passwords out of frustration. 2. without a password manager, if you do any sort of regular sharing passwords with a engineering team, friends & family, you'll resort to pretty insecure channels. 3. true E2E encryption, while still providing some surface area, has proven in the field through multiple pretty bad breaches[1], that it's a security model that holds up under real-world circumstances.
On the flip side, you are right: you are one compromised browser extension / binary away from having your local vault decrypted, and ALL your passwords compromised. But think about this: if someone has this much local access, chances are they can install a keylogger anyway, or read your clipboard, so the real difference is you've conveniently pre-loaded all your sensitive information in one go for the bad actor.
[1]For example: https://blog.lastpass.com/2022/12/notice-of-recent-security-...
I’ll stick to passwords that are impossible to guess and an encrypted vault with multifactor authentication.
This still leaves a case where someone manages to get the final key out of memory but you're pretty hosed at that point anyway. I'd prefer a system where the yubikey itself is doing the final credential decryption instead of the CPU, unfortunately most people aren't that paranoid though.
You could use a local vault and sync yourself, use a piece of paper in a safe, or use your brain to store them.
All of these come with tradeoffs and their own risks. Pick your poison.
I memorise good passwords for a handful of my most critical stuff (and have MFA). They don't go in my password manager.
If my password manager gets compromised then I probably could lose some cash, maybe get embarrassed by being impersonated on social media - it could get very inconvenient but not catastrophic.
Comparing to the common way of "managing" password (i.e. reusing one password everywhere), it is still a single point of failure. The difference is the attack surface balloons up in proportion to the number of website you sign up to. And just like a balloon, all it need is one poke, one website storing your password in plaintext to blow it all up.
I wouldn't be so sure about that. People store banking/payment credentials in them, so there is a large incentive to mount a scalable attack against an even moderately popular password manager. Crypto wallets are a popular target too for the same reason (although the risk is even more immediate there).
But what would you use instead for services that support only password authentication? And even for services with 2FA: If one of the factors is a password, where do you store it?