24 January 2024

At the Money: How to Pay Less Capital Gains Taxes

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Direct Index Tax-Loss Harvesting

Harvest stock-level losses while preserving diversified market exposure

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Insights & moments

The myth-busts, hot takes, explainers, and tools worth keeping.

Myth Buster· 2

Myth Buster03:58

A Direct Index Does Not Need to Own Every Index Constituent

Direct indexing can approximate a broad benchmark without holding every company in it. The discussed portfolios use a few hundred meaningful positions because many tiny benchmark weights contribute little to overall returns.

A representative portfolio can approximate a much larger benchmark.
Very small constituents may be removed for practical purposes.
The goal is similar mathematical performance, not literal replication.
Professional construction is needed to preserve diversification.

“A little bit less than that, say, probably three hundred, because many of those stocks had very very small positions in the S and P…”
Ari Rosenbaum · 04:13

“It may not look exactly like the S and P five hundred, but mathematically it'll perform similarly.”
Barry Rittoltz · 05:40

#indexing#portfolio construction#diversification

Myth Buster09:28

Tax-Loss Offsets Are Established Law, Not a Gray-Area Loophole

Rittoltz explicitly distinguishes this approach from questionable tax schemes. The strategy realizes genuine losses and uses them to offset genuine gains under established tax rules, although individual implementation still requires appropriate professional advice.

The method uses actual realized investment losses.
Those losses offset gains in appreciated positions.
The episode describes the practice as established law.
Investors still need portfolio-specific tax guidance.

“This is black letter law. The IRS is signed off on this. All of this is totally kosher and above board.”
Barry Rittoltz · 09:43

“the positions are at a gain, this particular concentrated position as a gain, we're able to take losses to offset that and work the position…”
Ari Rosenbaum · 09:49

#tax law#compliance#capital gains

Hot Take· 1

Hot Take07:35

Most Individual Companies Underperform With Twice the Volatility

The episode frames concentrated stock ownership as both a tax challenge and a portfolio-risk problem. Rosenbaum's research suggests most individual companies underperform the market while exposing investors to roughly twice its volatility.

A successful employer stock can still create dangerous concentration.
Emotional attachment may make diversification harder.
Individual-company risk can exceed the investor's intended exposure.
Tax planning can facilitate a safer exit from concentrated holdings.

“our research actually suggests that most individual companies underperform the market, and do so with about twice the volatility over time.”
Ari Rosenbaum · 07:42

“they were really emotionally invested in this particular position because they'd worked for the company and had done so well over time.”
Ari Rosenbaum · 08:06

#concentration risk#employee stock#volatility#diversification

Explainer· 1

Explainer02:17

Why Fund-Level Tax-Loss Harvesting Has Limited Opportunities

Tax-loss harvesting with mutual funds or ETFs generally requires selling the entire fund position and replacing it with a similar fund. Because broad equity markets rise in most years, the whole fund often has a net gain even when many of its holdings have declined.

Fund-level harvesting occurs at the price of the entire fund.
The investor sells and replaces the complete fund position.
Rising markets reduce the frequency of usable fund-level losses.
Losses among individual holdings remain inaccessible inside the wrapper.

“The challenge with that is that markets go up more often than they go down.”
Ari Rosenbaum · 02:48

“Seventy five percent of years since the founding of the S and P. Five hundred, the market's actually up”
Ari Rosenbaum · 02:51

#taxes#etfs#mutual funds#capital gains

Q&A· 1

Q&A10:30

Direct Indexing Cost 21 Basis Points With a $250,000 Minimum

Falling trading costs have made sophisticated portfolio customization more accessible, although it still requires meaningful capital. Rosenbaum reports an average platform fee of 21 basis points and a minimum investment of $250,000.

Trading costs have declined dramatically.
Trades are practically free at many custodians.
The cited average client fee is 21 basis points.
The cited platform minimum is $250,000.

“On our platform, the average fee a client is paying, as we've talked about basis points twenty one basis points”
Ari Rosenbaum · 10:49

“Two hundred and fifty thousand dollars er minimum?”
Ari Rosenbaum · 11:22

#fees#minimum investment#wealth management#accessibility

Takeaway· 1

Takeaway04:50

About 36% of Stocks May Fall Even When the Index Rises

A rising index can conceal substantial dispersion among its constituents. Rosenbaum says historical research on large-cap passive portfolios shows that about 36% of individual stocks are down in a typical year, creating stock-level tax opportunities unavailable through a net-positive fund.

Index performance masks differences among constituent returns.
Roughly 36% of individual stocks may decline in a given year.
A positive index return does not mean every constituent appreciated.
Return dispersion can have material tax value.

“Historically, what we see in a large cat passive portfolio like that, year by year, about thirty six percent of the individual stocks are down,…”
Ari Rosenbaum · 04:50

#market history#stock dispersion#tax opportunities