Tax-loss harvesting involves selling underperforming stocks at a loss, then using the proceeds to invest in correlated securities. Chances are advisors already use year-end TLH to help improve their clients’ after-tax returns. However, services like direct indexing accounts can scan portfolios for TLH opportunities throughout the year.
Investors directly own the individual stocks in their direct indexing portfolios. This means that losses can be captured even in a year when the index gains in value.
Vanguard noted that in the fourth quarter of 2021, the S&P 500 rose in value by 9.76%. And yet, there were still 133 companies on the index that lost value during that period. Those underperforming securities could be harvested for losses, which can be used to offset capital gains. Losses can also be carried over in future years.
And the frequency that a direct indexing account is scanned for TLH opportunities is key to maximizing investors’ tax alpha. A service like Vanguard Personalized Indexing can scan accounts quarterly, monthly, or even daily. VPI’s algorithms automatically review each account and harvest individual security losses as opportunities arise.
Per Vanguard, personalized indexing with daily TLH has boosted some investors’ after-tax returns by more than 2%. TLH can continue to deliver tax alpha for high-net-worth investors even if the market experiences some degree of volatility.
Vanguard CEO Tim Buckley said at Exchange 2023 that the company will “be investing heavily” in the direct approach to indexing. More information about VPI can be found online.
For more news, information, and analysis, visit the Direct Indexing Channel.