When Should I Consider Direct Indexing?

Direct Indexing is something you should be considering if you are saving in Taxable accounts and/or want to do some targeted investing around themes that are important to you. These are the two concepts I will cover in this two-minute read. 

As some background, Direct Indexing is a way for you to get surgical with your investments. The short version is instead of holding a massive basket of stocks and bonds via mutual funds or ETFs that all move as one, you can hold a smaller amount of individual stocks and bonds that are chosen to achieve certain goals, such as tax savings and/or avoiding certain businesses. And, with Direct Indexing, these positions move individually.  

I am not going deep into how Direct Indexing works as I wrote about that recently. Click here to read that article. Instead, I want to focus on those times I think it makes sense for you to consider Direct Indexing. 

• If your Marginal Tax Bracket starts with a 3 (32%, 35% or 37%).
• You are saving at least $100,000 a year into Taxable accounts. 
• Maybe you have a large inflow of Cash, say from selling your practice. 
• You would like to include and/or exclude certain companies from your investments. 
• You just want to be as tax smart as possible with your Taxable investments. 

 Most of my clients who use Direct Indexing are focused on Tax Savings. I mentioned in that other article how one set of clients had tax savings of 5% a few years back. Others have already seen savings of 1% this year. I don’t know about you, but those types of tax savings can add up over the years.  

With thematic Direct Indexing you can invest to focus on certain themes, such as Sharia Law portfolios or maybe ones that exclude companies that have poor environmental ratings. Yes, there can be tax savings with these Thematic models, however, the primary focus is to include or exclude those types of companies that are in conflict with your stated goals.  

Again, if you are in a higher tax bracket, saving into Taxable accounts regularly, and are tired of tipping Uncle Sam, a Direct Index portfolio may make sense for you. You can potentially get more tax-bang for your buck and at a lower cost than trying to achieve the same goals with more expensive mutual funds and ETFs.  The same applies if your approach is to “put your money where your mouth is” and invest in those companies that align with your personal beliefs. 

If Direct Indexing sounds like something you want to learn more about, just send me an email to dan@forwardthinkingwm.com.