For long -term investors, keeping an eye on the market has been a reliable way to make money. In the last 30 years, S&P 500 has also given an average annual return of about 10%during the period of instability.
This is why many investors in a simple and efficient way mirrors the performance of the broad market, usually move the exchange-traded funds (ETFs) to index funds.
But what if you can maintain the same market risk by unlocking meaningful and gaining more control over your portfolio?
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This is the place where direct sequencing comes.
The Kiplinger Building Wealth Program assigns retirement, estate planning and tax strategies to financial advisors and business owners around the world to preserve and increase your money. These experts, who never pay to include on the site, include professional money manager, Fidussian Financial Planner, CPA and lawyer. Most of them have certificates including CFP®, CHFC®, IAR, AIFO®, CDFA® and more, and their stellar records can be checked. Second Or Finara ,
Unlike ETFs, which bundle the entire index into a fund, direct indexing involves owning individual stocks that make index. It opens the door of a powerful strategy called tax-loss harvesting.
Once the ultraavency is reserved for investors, direct indexing is now more accessible than ever, thanks to technology that makes it easier to apply and manage it.
Direct sequencing 101
Direct indexing allows you to invest in the market by capturing individual stocks that create an index instead of buying ETFs, such as ETFs. This structure gives you more flexibility and control, especially when it comes to taxes.
Because you separate each stock separately, you can take advantage of the loss at a personal stock level, even when the broad index is performing well. This creates more opportunities for taxation harvesting, a strategy where you sell securities that have declined to offset the profit and reduce your tax bill.
In FREC, where I am the founder and CEO, our research shows that the direct sequencing of S&P 500 can harvest up to 40% of your portfolio in a period of 10 years-and in some cases, even more, you are tracking based on the index.
It is almost double that the traditional ETF-to-ETF tax-defricate strategies are usually distributed. For an investment of $ 100,000, you can generate about $ 40,000 in tax deficit more than a decade. If your tax rate is 33%, then in potential tax savings it is approximately $ 13,200.
There are four benefits of direct sequencing here:
Direct indexing creates more opportunities for tax-loss harvesting than traditional ETFs. Because you are the owner of individual stocks, your portfolio is likely to catch dozens of – or even hundreds of damage, even when the overall market is up.
Instead of waiting for the decline of an entire ETF, our platform continuously scan the stock within your index and performs tax-loss trades when the opportunity arises. This helps reduce your taxable profit and in turn, your tax bill.
One of the major ideas in this process is the wash-cell rule, an IRS regulation that prevents a tax loss if you restore “equally” security within 30 days before or after selling it.
Our latest innovation, strategic wash sale, allows investors who continuously accumulate tax-loss harvesting to 16%. This approach enables customers to deposit as often, as they want without worrying about the wash-cell boundaries affecting their tax efficiency.
FREC customers can also promote their returns through stock lending, allowing investors to lend their shares for low sales, generating additional income while maintaining ownership.
Number 2: Wins despite market status
One of the unique strength of direct indexing is the ability to benefit investors in both bull and bear markets.
When the markets arise, you capture the profit like any index investor.
When the markets fall, you occupy tax loss that makes real economic values for the coming years. This is like receiving consolation prizes during the market fall.
Number 3: Adaptation for your needs
Unlike ETF, which applies a size-fit-all approach, direct sequencing gives you control over what you do and what not.
For example, if you work in a company like Microsoft and get stock-based compensation, you may already be overhaxed for that stock.
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Since Microsoft makes a large part of S&P 500, purchasing ETF can further focus your risk. Direct indexing allows you to adjust your exposure, while all keep their overall index alignment.
You can also remove companies that do not fit your investment criteria, such as ESG preferences. With an ETF, you get everything. With direct indexing, you decide what you have.
It is easy to start. When installing a direct index with FREC, you can give it a cash, existing stock or fund with both. You can transfer stock directly from other brokerage without avoiding tax results.
This smooth process lets you upgrade your investment approach without triggering taxable events.
Is direct indexing right for you?
Direct sequencing provides the most value for investors:
Important taxable investment accounts
Falling in high tax brackets
Want more control over their portfolio makeup
There is enough capital advantage to offset
Even if you do not have capital gains to offset today, you can compensate for profit during the investment phase, potentially delay tax payments over years.
Worried can it be harder to get out of the direct index than an ETF? While selling a basket of individual securities can be more complex than selling single funds, potential tax savings – both during the investment period and on return – often make that tradeoff meaningful. And with modern platforms, this process is far more streamlined, which was used.
Ideas before diving in
Direct indexing may not be a good fit for you, though. Be sure to consider:
If you are already not contributing to your retirement accounts, you should do this exactly before contributing to the direct index (or taxable account).
If you never have capital gains-for example, you are planning to retire only on 401 (K) or other tax-deprived accounts-you can stick with super-lo-cost ETFs because you cannot use tax loss.
If you want to trade many positions actively within the index, you are expecting to track (ie you can buy spy/voo etf, but actively S&P 500 can trade a bunch of shares) or retirement accounts that are individual stocks (no way to manage wash sale).
Direct sequencing, rebuilt for today’s investor
Direct indexing is a powerful strategy that is changing people how to invest in the index, offering a more efficient approach that can promote tax-return.
The strategy gives you the simplicity of index investment with benefits only by providing you only through complex active management.
To develop your money more efficiently for self-directed investors, direct sequencing inserted powerful tools in your hands with ease of passive investment. All are done automatically, without paying expensive fees to human advisors.
Investment includes risk, including the risk of loss. FREC’s AUM fees are 0.10% – 0.35% depending on the index. Brokerage services provided by FREC Securities LLC, members Finra/SIPC and FREC Advisors LLC provided by advisory services, a sec ria. Both FREC markets are assistant companies, Ink.
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This article presents the ideas of our contributing advisor, not by Kiplinger editorial staff. You can check advisory records with Second Or with Finara ,
