Tax-loss harvesting involves selling investments at a loss, then using those losses to offset gains in other investments. The investor takes the money from the sale and uses it to buy an investment that fills a similar role in your portfolio. This strategy is one of the primary benefits of direct indexing.
For investors who have heard about this strategy but are still not convinced, Vanguard suggests four key benefits:
Saving on Taxes Paid Each Year
Well, this one’s pretty obvious. Harvesting tax losses can reduce the dollar amount an investor would have owed on capital gains when filing their taxes. If an investor doesn’t have gains in the same tax year, then they can carry forward those losses to use in future years.
Grow the Portfolio By Tax-Loss Harvesting
In addition to reducing an investor’s tax bill, tax-loss harvesting can also build their portfolio. Once the investor reaps the rewards of the strategy, that investor can then reinvest their tax savings into their portfolio. Once in the portfolio, those savings will compound over the life of the investment, significantly increasing the financial benefit.
Reducing Portfolio Risks and Overall Costs
Some ultra-high-net-worth investors have assets they want to sell because of high costs or risks. A CEO could be overweight their company’s stock and might want to sell off part of their position, for example. Tax-loss harvesting offers a way to do this while also potentially lowering a large tax bill.
Turn Volatility into Opportunity With Tax-Loss Harvesting
Investors can’t control markets. But they can control things like costs and taxes. Thus this strategy offers a way for investors to benefit from market volatility.
Vanguard CEO Tim Buckley said at Exchange 2023 that the company will “be investing heavily” in direct indexing.
A direct indexing service like Vanguard Personalized Indexing automatically scan portfolios for tax-loss harvesting and rebalancing opportunities year-round. More information about VPI can be found online.
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