As Benjamin Franklin — you know the guy — once said, “in this world, nothing is certain except death and taxes.” But just as Franklin said that taxes are inevitable, he also said: “He does not possess wealth; it possesses him.” So, that also may be worth remembering. While taxes are a certainty, there are tools for investors to at least mitigate that inevitable annual tax bill. One of those tools is direct indexing, which is gaining in popularity among investors for its tax-loss harvesting abilities.
Tax-loss harvesting strategies involve selling securities at a loss, then using the proceeds of the sale to replace them with similar stocks in a portfolio. This can dramatically reduce a client’s tax bill.
See more: Direct Indexing Can Enhance Positive Impacts
“Such strategies can also be accessed through investment advisors via their custodian firms,” according to a white paper from QuantStreet Capital. “TLH strategies are not relevant for tax-advantaged accounts like 401Ks or IRAs.”
Tax-loss harvesting is the special superpower of direct indexing accounts. A direct indexing service like Vanguard Personalized Indexing automatically scan portfolios for tax-loss harvesting opportunities at a set frequency. And that frequency can be monthly, quarterly, or even daily.
The more frequent the scans, the higher and more consistent the tax-loss harvesting alpha. The differences in tax-loss harvesting alpha can be huge. In fact, Vanguard found that the difference can range from 20 basis points to more than 100.
Direct indexing has often been seen as a service reserved only for the UHNW investor. However, Vanguard CEO Tim Buckley said at Exchange 2023 that the company was working to change that. More information about VPI can be found online.
For more news, information, and analysis, visit the Direct Indexing Channel.
