Ultra high net worth investors have been using direct indexing to reduce their annual tax bill for years. But thanks to breakthroughs in technology and the ability to buy fractional shares, direct indexing has become more accessible. A wider array of investors can now enjoy direct indexing’s tax-loss harvesting (TLH) capabilities.
Tax-loss harvesting involves selling investments at a loss to use the losses to offset gains in other investments. The investor uses the money from the sale to buy an investment that fills a similar role in the portfolio.
It’s a process that can potentially help investors earn better returns and lower their taxes. It’s also a process that is one of direct indexing’s superpowers.
A direct indexing account sells securities that drop below their cost basis. It then uses the proceeds to immediately buy correlated (but not substantially identical) replacement stocks.