Cash holdings were at almost record highs at the start of the year as volatile stock and bond markets led investors to put a record amount of capital into money market accounts at the end of 2022. However, most advisors are now bullish on equities for the remainder of 2023.
According to a recent Pulse survey by InspereX, more than half (53%) of the 705 financial advisors surveyed expect the S&P 500 to gain at least 10% by the end of the year. With stocks back on the rise (the S&P 500 is up nearly 9% year-to-date), now may be the time to put that cash back to work.
For high net worth investors sitting on cash and wanting to reinvest that money in stocks, direct indexing may be an option worth looking into. Direct indexing, also known as personalized indexing, is an individual account that’s managed to track an index, like a separately managed account. The investor owns the individual securities while an asset manager manages the account on their behalf.
For HNW investors with the ability to fully fund a new portfolio from the ground up with cash, now could be the ideal time to take advantage of the tax-loss harvesting opportunities that a direct indexing strategy provides.
Tax-loss harvesting involves selling an investment at a loss, then reinvesting the proceeds of that sale into another asset. While investors can’t sell individual failing stocks for tax-loss harvesting purposes within a mutual fund or ETF, they can sell securities at a loss to offset capital gains through direct indexing. And unlike a traditional SMA, direct indexing offers scalable, automatic tax-loss harvesting.
Direct indexing software scans the portfolio for harvesting opportunities at a set frequency (daily, quarterly, or monthly). Generally, the more frequent the scans, the higher and more consistent it is.
According to Vanguard, the differences in tax-loss harvesting opportunities alpha can range from 20 to more than 100 basis points. When considering a direct indexing strategy for its tax-loss harvesting abilities, one with daily harvesting scans “is critical to achieving the maximum harvest in ‘typical’ (non-high) volatility environments,” Vanguard added.
For high net worth clients with significant capital gains, Vanguard Personalized Indexing automatically scan portfolios throughout the year for tax-loss harvesting and rebalancing opportunities. It can also help capitalize on volatile markets without violating the wash-sale rule. More information about Vanguard Personalized Indexing can be found online.
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