By Brian Spinelli, CFP®, AIF®, Co-Chief Investment Officer
This eBook offers a comprehensive guide to understanding how advanced direct indexing strategies can potentially help investors with at least $1 million in invested capital diversify and manage capital gains over time.
Understanding Advanced Direct Indexing Strategy
The advanced direct indexing strategy, designed for investors with at least $1 million in assets, seeks to add excess investment return over its benchmark while also providing tax advantages that can be used to offset other capital gain events. This strategy maintains diversified stock positions that incorporate both strategic long and short elements, which can enable investors to enhance portfolio resilience while differentiating from traditional direct indexing methods. By integrating long/short equity elements, the strategy is designed to harvest short-term losses while aiming to maximize long-term gains. Harvested short-term losses can become valuable to offsetting the capital gains of selling a business.
This approach goes beyond standard passive investing, offering the ability to loss-harvest more individual stock names. By systematically harvesting losses within the broader index, investors can offset gains from selling assets. This helps make it possible to begin diversifying without facing the full tax burden upfront. Over time, this strategy allows for broad stock market diversification while seeking to achieve tax neutrality year-over-year.
There are a lot of inexpensive investment vehicles that seek to mimic the returns of the U.S. stock market. One of those options is for an investor to buy a single ETF or mutual fund. This essentially helps the investor buy most of the U.S. stock market components without having to buy multiple individual stocks.
Another option is having an account that buys individual stocks of the market, rather than investing in an ETF, where the investment is being pooled with other investors. The advantage here is that, instead of only having one ETF or mutual fund, an investor is able to actively sell the individual stocks that might be at a loss in their account. For example, in 2024, the Russell 3000 index was up close to 24%. However, although the index was up 24%, not every stock within the index increased. In fact, 890 stocks out of the 3,000 finished 2024 with negative returns. If investors throughout the year had chosen to sell those 890 stocks, they would have had the ability to harvest capital losses for tax purposes while still generating positive returns on the overall index they were trying to replicate.
When to Start Planning a Direct Indexing Strategy
Timing in a direct indexing strategy allows for more tax benefits. Ideally investors should evaluate advanced direct indexing strategies well before significant liquidity events, such as selling a business. The earlier you begin, the more time you will have to accrue tax losses that can help offset future gains.
Deferring money into a portfolio over time to prepare for future use of this direct indexing strategy is wise. Investors can only contribute money from the proceeds of the sale of a business or other money saved outside of tax-deferred retirement accounts.
In addition to direct indexing, diversification beyond stock holdings is essential. By incorporating alternative assets, such as real estate, private equity, or bonds, investors can potentially reduce volatility and minimize risk, thereby building a more durable and stable financial future. A well-rounded plan that incorporates both direct indexing and broader asset diversification provides a prudent path to long-term financial resilience.
Five Ways to Take Action with Direct Indexing
Direct indexing provides a personalized approach to managing investments in publicly traded companies and is designed to offer both tax efficiency and long-term growth. To fully leverage this strategy, take action by:
- Assessing your assets.
- Determining your tax exposure from selling these assets.
- Exploring diversification options with direct indexing.
- Planning before significant liquidity events.
- Discussing customized tax-advantaged indexing solutions with your financial advisor.
Where to Go From Here – Find an Advisor with Direct Indexing Experience
Not all financial advisors possess the expertise or resources necessary to implement advanced direct indexing strategies effectively. It’s essential to ask your advisor the right questions to help ensure your financial goals are met. Consider starting with:
- What is your experience with direct indexing and managing taxable gain issues?
- Is direct indexing appropriate for your goals and holdings?
- How can direct indexing help you diversify your portfolio while managing your tax burden?
- What are the potential tax savings?
- What is the ideal timeline for a direct indexing strategy?
- How can you diversify your portfolio beyond a direct indexing strategy?
Are you a small business owner interested in learning more about direct indexing? Download our e-book specifically for what small business owners need to consider when selling a business and considering a direct indexing strategy or contact us to learn more.
Disclosures
Halbert Hargrove Global Advisors, LLC (“HH”) is an SEC registered investment adviser with its principal place of business in Long Beach, California. HH may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Registration does not imply a certain level of skill or training. For information pertaining to the registration status of HH, please contact HH or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Additional information about HH, including our registration status, fees, and services can be found at www.halberthargrove.com.
This blog is provided for general information purposes only. No portion of the content serves as the receipt of, or as a substitute for, personalized investment advice from HH or any other investment professional of your choosing. Different types of investments involve varying degrees of risk, and it should not be assumed that future performance of any specific investment or investment strategy, or any non-investment related or planning services, discussion or content, will be profitable, be suitable for your portfolio or individual situation, or prove successful. Neither HH’s investment adviser registration status, nor any amount of prior experience or success, should be construed that a certain level of results or satisfaction will be achieved if HH is engaged, or continues to be engaged, to provide investment advisory services. HH is neither a law firm nor accounting firm, nor does it serve as an attorney, accountant, or insurance agent. No portion of its services, or this content, should be construed as legal or accounting advice. HH does not prepare legal documents or tax returns, nor does it sell insurance products. No portion of the content should be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if HH is engaged, or continues to be engaged, to provide investment advisory services.
Any examples discussed within this publication are presented for illustrative purposes only to provide examples of how the strategy may be utilized. The information contained herein is based upon certain assumptions, theories and principles that do not completely or accurately reflect your specific circumstances. HH makes no representation as to whether investment in any security or strategy mentioned herein was profitable or would have been profitable for any person in the past. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable. There is no guarantee that the prevailing financial and economic conditions during the time frame of the examples will continue. Past performance is no guarantee of future results.
The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation.
There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially and should not be relied upon as such. This publication should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy. This material should not be relied upon by you in evaluating the merits of investing in any securities, products, or strategies mentioned herein. In addition, the Investor should make an independent assessment of the legal, regulatory, tax, credit, and accounting and determine, together with their own professional advisers if any of the investments mentioned herein are suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield may not be a reliable guide to future performance.
Forward-looking statements are subject to numerous assumptions, risks and uncertainties which change over time. Predictions, opinions, and other information contained in this presentation are subject to change continually and without notice of any kind and may no longer be true after the date indicated. HH assumes no duty to and does not undertake to update forward-looking statements. There is no guarantee any forward-looking statement will come to pass.
The investment strategy discussed herein involves the use of margin. The use of margin poses additional risks beyond those associated with traditional long-only investment strategies. The use of margin may be unsuitable for some investors depending on their specific investment objectives and financial situation. You should carefully review any margin agreement to understand the risks and liabilities associated with utilizing margin.
Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without previous notice. All opinions or views reflect the judgment of the author as of the publication date and are subject to change without notice. All information presented herein is considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. Information set forth herein has been obtained or derived from sources believed by HH to be reliable. However, HH does not make any representation or warranty, express or implied, as to the information’s accuracy or completeness, nor does HH recommend that the attached information serve as the basis of any investment decision. Any reference to a market index is included for illustrative purposes only as it is not possible to directly invest in an index. It should not be assumed that your account performance or the volatility of any securities held in your account will correspond directly to any comparative benchmark index. It should be noted that any reference or link to a specific product, strategy, company, etc. is for illustrative purposes only and should not be construed as recommendation or endorsement.
