Key takeaways:
- Periods of market volatility test our nerves but can also present opportunities
- Volatile markets are a good time to harvest tax losses for use later to offset taxable gains
- Using a direct indexing strategy can allow investors to selectively harvest losses that can then be used to offset gains from other parts of their portfolios
Investing in stocks so far in 2025 has not been for the faint of heart. Some market indices have undergone wild swings, flirting with bear-market territory. And with a lot of unknowns still to be resolved, we expect markets to remain choppy for a while.
These periods of volatility may be nerve-wracking, but they can also present opportunities. Here’s how your clients can take advantage of the volatility by employing tax-loss harvesting strategies in a Direct Indexing portfolio to potentially reduce tax liabilities.
Making lemonade out of lemons
The central goal of direct indexing is to build a portfolio that imitates an index while maintaining the flexibility of holding each security separately. With direct indexing, the investor owns the actual basket of stocks that are representative of the chosen index. For example, a direct indexing portfolio in a separately managed account (SMA) tied to the S&P 500 Index could hold anywhere between 200 and 400 stocks.
The advantage that direct indexing holds in volatile markets is that since the investor owns the individual securities, they can select which declining stocks to sell, and the subsequent losses then belong to them. The investor can use those losses at a later date to offset gains in other parts of their portfolio. That can be extremely helpful in reducing the investor’s tax bill and is why we often refer to tax losses as tax “assets.”
Gaining from losing
These tax “assets” offer increased flexibility to help your clients manage their tax bill. As noted, any losses harvested belong to the investor and can be applied indefinitely against any future gains (up to $3,000 of residual losses can be utilized to offset income annually). In fact, these losses can be used to offset gains not only in an investment portfolio but also those resulting from the sale of other assets such as an investment property or business.
The last major period of volatility was in 2022, when the S&P 500 lost 18%. A direct indexing strategy would have had the ability to capture significant tax losses—thanks to the market volatility and the strategy’s ability to tax-loss harvest. This highlights a key advantage for long-term investors: the ability to “bank” losses during volatile periods and use them immediately or in the future to offset gains.
Direct Indexing within the Russell Investments’ Personalized Managed Accounts (PMA) program may offer even more advantages. The personalized SMAs can be managed for tax efficiency, and tax-loss harvesting would be an essential part of their broad tax-management toolkit. With PMA the investor can use losses in one SMA to offset gains in other holdings in their overall household level account.
The bottom line
The ability to tax loss harvest doesn't make up for the market losses clients occasionally experience but it can soften the blow. Make sure your clients know there's a cushion out there.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out some of our webcasts.
Each Personalized Separately Managed Account is a product of Russell Investment Management, LLC (”RIM”) and offered through RIM’s Personalized Managed Accounts (“PMA”) program. It represents a model portfolio provided by RIM. For active SMAs, it reflects a composite of third-party investment advisors selected by RIM. When the model is implemented, PMA is a separately managed account program of individually owned securities that can be tailored to meet investor’s investment objectives. RIM offers diversified, single or multi-asset managed accounts that can be customized to the investor’s investment objectives, circumstances and preferences, such as (but not limited to), market exposure, risk management, tax management, category and theme-based restrictions, and return objectives. Excluding any allocations to pooled investment vehicles, if any, each investor’s account is managed separately from other investor accounts, allowing for a personalized experience to deliver unique investment outcomes.
The decision to use PMA in investors’ portfolios and related investment advice are provided through financial advisors and other financial intermediaries that are independent of RIM and its affiliates. You should consult their financial advisor to determine which services and programs are appropriate to meet their investment objectives.
These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.
This material is not an offer, solicitation or recommendation to purchase any security.
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.
Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment. The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.
Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the "FTSE RUSSELL" brand.
The Russell logo is a trademark and service mark of Russell Investments.
The information, analyses and opinions set forth herein are intended to serve as general information only and should not be relied upon by any individual or entity as advice or recommendations specific to that individual entity. Anyone using this material should consult with their own attorney, accountant, financial or tax adviser or consultants on whom they rely for investment advice specific to their own circumstances.
Products and services described on this website are intended for United States residents only. Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained on this website should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional. Persons outside the United States may find more information about products and services available within their jurisdictions by going to Russell Investments' Worldwide site.
Russell Investments is committed to ensuring digital accessibility for people with disabilities. We are continually improving the user experience for everyone, and applying the relevant accessibility standards.
Russell Investments' ownership is composed of a majority stake held by funds managed by TA Associates Management, L.P., with a significant minority stake held by funds managed by Reverence Capital Partners, L.P. Certain of Russell Investments' employees and Hamilton Lane Advisors, LLC also hold minority, non-controlling, ownership stakes.
© Russell Investments Group, LLC. 1995-2025. All rights reserved. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an "as is" basis without warranty.
© Russell Investments
More Risk Management Topics >
