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Direct Indexing

Posted: Sun Jan 15, 2023 6:42 pm
by ppnewbie
I heard a very interesting comment by Burton Malkiel. With direct indexing they can buy a select group of stocks that tracks the index but if a stock is down the direct indexer can sell it and buy another stock similar to tax loss harvest.

Re: Direct Indexing

Posted: Thu Jan 26, 2023 11:50 am
by ppbob
Schwab has a version of this. The expense ratio 0.4% is too high for me but it has interesting features. They design portfolios to track four different broad market indexes. They allow you to do tax loss harvesting.

I think there would also be problems with income tax reporting, but if you download the 1099 into a tax program, it would be your computer talking to the IRS computer. I would hate for it to bring one of the 87,000 new IRS agents on my case.

https://www.schwab.com/direct-indexing

Re: Direct Indexing

Posted: Thu Jan 26, 2023 3:10 pm
by welderwannabe
Im also not sure theyve figure out the transfer process from one brokerage to another.

The stocks would transfer fine, sure, but its just gonna look like a pile of stocks to the receiving broker. Direct indexing is really a method to keep you from being able to churn out to another broker, or at least thats my fear.

I'll stick with mutual funds for now. You can always break that up into S&P + Extended market to do some TLH without the complexity of holding 500 stocks.

Re: Direct Indexing

Posted: Sat Apr 08, 2023 5:14 pm
by ochotona
The Schwab minimum for this is $100k. The Fidelity minimum is $4.

The Fidelity tax loss harvesting, net of fees and taxes, on average, going back more than a decade, gets you 100 basis points added performance on top of the S&P500. That's nothing to sneer at. But 2022 was not an average year...

I had an exchange today on Reddit with a Fidelity Direct Indexing user... they said in 2022 the managed FidFolio TLH got them a 14% return, in a year when US Large Caps were down 18% (so in the end, I presume they only had a 4% loss). That's damned impressive turning lemons into some kind of juice drink.

Eventually, I'm going to do this. I have some personal things I want to do with my cash... home renovations, etc. But I can't see not doing this with my taxable money. It makes too much sense.

Re: Direct Indexing

Posted: Sat Apr 08, 2023 5:20 pm
by ochotona
welderwannabe wrote:
Thu Jan 26, 2023 3:10 pm
The stocks would transfer fine, sure, but its just gonna look like a pile of stocks to the receiving broker. Direct indexing is really a method to keep you from being able to churn out to another broker, or at least thats my fear.
That's not it at all. The point of DI is that even when an index is going up, there are stocks that are getting taken out in back and shot in the back of the head.

Example... the Deepwater Horizon disaster, April 2010. BP stock lost HALF of its value over that Spring and Summer. It would have been so easy for an algo to harvest that juicy loss and replace BP with ExxonMobil or Chevron. There are always losses to be harvested, and other players to put in their places.

DI takes advantages of the unique risk individual companies face, while still letting investors hold a highly diversified stock portfolio with hundreds of stocks.

Sure, if you're unhappy with you broker, don't start DI with them. If you're unhappy with your girlfriend, don't make a baby with her.

Re: Direct Indexing

Posted: Sat Apr 08, 2023 7:19 pm
by vnatale
Somewhat related:

https://www.fa-mag.com/news/the-one-tru ... ?section=2

The One True Free Lunch For Investors

"In the best-case scenarios, efficient asset location can moderately boost returns each year, although estimates vary. Rowling says some studies show an increase by as much as 100 to 200 basis points a year, though the devil’s in the assumptions."

Re: Direct Indexing

Posted: Sat Apr 08, 2023 8:55 pm
by ochotona
vnatale wrote:
Sat Apr 08, 2023 7:19 pm
Somewhat related:

https://www.fa-mag.com/news/the-one-tru ... ?section=2

The One True Free Lunch For Investors

"In the best-case scenarios, efficient asset location can moderately boost returns each year, although estimates vary. Rowling says some studies show an increase by as much as 100 to 200 basis points a year, though the devil’s in the assumptions."
It's absolutely related... the stocks in an index are not perfectly correlated, and may even be badly correlated in some cases... Direct Indexing leans into that by applying tax law to defer taxes into the future. You're never eliminating them... you're deferring them. But hopefully you're deferring them to a future when you're old and maybe your tax bracket is low (long-term cap gains tax can go to zero, for most it's 15%), or your heirs get the assets. It won't help if the future capital gains tax is 50%, or if you have a high, high income in retirement, like $500,000 per year, though!