Direct Indexing Portfolios
Direct index investing is a personalized approach to investing that involves purchasing the individual stocks that make up an index, rather than buying shares of a mutual fund or an exchange-traded fund (ETF) that tracks the index. This method allows investors to directly own the underlying securities of the index, providing several advantages over traditional fund-based index investing.
Securities offered through Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Advisory services offered through Portside Wealth Group, an SEC registered investment adviser. Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices does not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends. This material is not to be interpreted as tax or legal advice. Please speak with your own tax and legal advisors for advice/guidance regarding your particular situation.
Direct index investing is a personalized approach to investing that involves purchasing the individual stocks that make up an index, rather than buying shares of a mutual fund or an exchange-traded fund (ETF) that tracks the index. This method allows investors to directly own any specific shares in the underlying securities of the index, providing several advantages over traditional fund-based index investing.
One of the primary benefits of direct indexing is tax optimization. Investors can engage in tax-loss harvesting by selectively selling individual stocks inside the index that have lost value to offset gains from other investments. This strategy can help reduce an investor's overall tax liability, potentially increasing after-tax returns. Mutual funds and ETFs cannot offer this level of customization since they distribute gains and losses across all shareholders uniformly, regardless of individual circumstances.
Customization is another significant advantage of direct indexing. Investors can tailor their portfolios to align with personal preferences or ethical considerations. For example, one might exclude certain industries or companies that do not align with their values, such as those involved in fossil fuels or tobacco. This level of customization is not typically possible with mutual funds or ETFs, which follow the index composition rigidly.
Furthermore, direct indexing provides more control over capital gains. In mutual funds and ETFs, investors have limited control over when gains are realized, as these funds must periodically rebalance to match the index. Direct indexing allows investors to manage their portfolios more proactively, deciding when to buy or sell individual securities to optimize capital gains realization according to their financial plans.
Direct index investing offers substantial benefits, including tax optimization, portfolio customization, and enhanced control over capital gains. It is also considered a low-cost strategy that could allow for more money to stay invested and compound over time. These advantages make it an attractive option for investors seeking a more tailored and potentially more tax-efficient approach to index investing compared to traditional mutual funds and ETFs. If you are interested in learning more or discussing how this strategy fits into your financial plan, click the link below to schedule a meeting with our team.
Does a Roth Conversion Make Sense for You?
A Roth IRA is one of the most impactful wealth-building tools available. Contributions into a Roth IRA are classified as after-tax, allowing funds to grow tax-free for the remainder of its account life – a huge advantage as opposed to other retirement accounts where distributions are taxed.
A Roth IRA is one of the most impactful wealth-building tools available. Contributions into a Roth IRA are classified as after-tax, allowing funds to grow tax-free for the remainder of its account life – a huge advantage as opposed to other retirement accounts where distributions are taxed. Roth accounts are also not subject to required minimum distributions (RMDs), which means little to no taxes would be paid on funds withdrawn from Roth IRAs during retirement.
If you make too much income to contribute to a Roth IRA directly*, you can still take advantage of these benefits by completing a Roth Conversion. This becomes an even more attractive scenario for someone to convert their Traditional IRA assets to Roth during low market environments, as we have seen recently.
When you convert your account to a Roth, you will report the dollar amount converted as income for that year. Filing higher income on your taxes may seem counterintuitive but converting your account to a Roth now (pre-retirement) allows you to pay taxes on that money now. When you retire, you will not have to pay taxes on those funds when withdrawn, allowing funds to be used towards your goals or needs instead.
Bear markets, though challenging, lend an opportunity to capture the downside when converting your account (buy low, sell high) and will result in a lower tax bill on the conversion than in a bull market. Converting your Traditional assets to Roth during a market downturn allows you to benefit from a rebound even more with tax-free dollars. The IRS allows for partial conversions, too.
Feel free to reach out if this is something you would like to discuss further, and our team would be happy to assist you.
Because investor situations and objectives vary this information is not intended to indicate that an investment is appropriate for or is being recommended to any individual investor.
There are retirement account risks that could diminish investor returns, such as, but not limited to: low interest rates, market volatility, withdrawal timing and sequence of returns risk, government policy uncertainty and increased longevity. Prospective investors should perform their own due diligence carefully and review the “Risk Factors” section of any prospectus, private placement memorandum or offering circular before considering any investment.