Enabled by technological and pricing advancements, more and more investors are turning to Direct Investing (also known as Direct Indexing or Personal Direct Investing) to create portfolios—built using individual stocks—that reflect their specific needs, requirements, and values, with the additional benefit of potential tax savings.
At its most basic form, Direct Investing can be done via Direct Indexing, an approach to index investing that involves buying the individual stocks that make up an index. Typically, you don’t have to own all the stocks in the index to get a similar risk and return profile. You could, for example, create a Direct Index of the S&P 500 with fewer than 100 stocks.
You also have the opportunity to create a customized version of the index and personalize it with your individual preferences, goals, values, and circumstances. If you work in the technology sector, for example, and part of your compensation is in stock options, you may want to lessen your overall tech exposure by holding fewer tech stocks.
Many low-cost mutual funds and/or ETFs track indexes, so what makes Direct Investing beneficial?
The main advantage is enhanced customization. As an investor, you have the potential to:
Direct Indexing really becomes Personalized Direct Investing—as you move toward more specialized indices that reflect your preferences, as well as specific over (or under) weighting strategies, such as tilting to the factors of return such as Small, Value, and Momentum.
Tax optimization and potential tax savings are the most significant value associated with Direct Investing since it allows for more agile and specific tax-loss harvesting. If you own an S&P 500 index fund, you only have the overall return of the ETF to work with. If you owned all 500 stocks, however, some would have positive returns, and some would have negative, allowing you more flexibility in pairing gains and losses.
Tax-loss harvesting isn’t a new concept. With advances in technology, this process can now be executed efficiently on an ongoing basis, maximizing your overall benefit.
Another tax-efficient feature of Direct Indexing involves individual securities holdings. If you already have a potential tax liability from a long-term holding with a low-cost basis, or you have significant wealth in the form of equity compensation from a publicly traded company, you can use Direct Indexing to facilitate a plan to slowly exit a highly appreciated or concentrated equity position.
Lastly, Direct Indexing may be a solution worth exploring if you have significant assets in taxable accounts or are generally tax-sensitive since you have more control over what is bought or sold—and when.
If you want to express specific values, such as incorporating environmental, social, and governance (ESG) or socially responsible investing (SRI), Direct Indexing can be an effective solution.
For example, you can adopt a strategy that either screens out certain securities or overweight companies that have adopted certain standards and practices.
Direct Investing also enables you to integrate certain investment strategies into your portfolios. For instance, overweighting specific characteristics of risk (aka “risk factors”) such as Value, Momentum, or Quality to capture the potential long-term performance benefits identified by academic research can be accomplished while tailoring those exposures to your specific tax and values preferences.
For investors looking for a flexible, personalized investing solution, Symmetry’s Axiom platform is built to make the most of Direct Investing’s potential.
Each Axiom solution enables investors to better manage the potential impact of taxes, add or remove specific stocks or types of stocks, and create unique portfolios tailored specifically to you.
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Investing involves risk, including the loss of some or all of your principal. Diversification seeks to reduce volatility by spreading your investment dollars into various asset classes to add balance to your portfolio. Using this methodology, however, does not guarantee a profit or protection from loss in a declining market.