{"id":4208,"date":"2026-03-02T12:37:44","date_gmt":"2026-03-02T19:37:44","guid":{"rendered":"https:\/\/smedleyfinancial.com\/wp\/?p=4208"},"modified":"2026-03-18T12:41:03","modified_gmt":"2026-03-18T18:41:03","slug":"why-some-investors-switch-to-direct-indexing","status":"publish","type":"post","link":"https:\/\/smedleyfinancial.com\/wp\/why-some-investors-switch-to-direct-indexing\/","title":{"rendered":"Why Some Investors Switch to Direct Indexing \u2014 Mikal Aune"},"content":{"rendered":"\n

After several strong years in the market, many investors are sitting on sizable gains. When those gains live inside taxable accounts, they can quietly turn into a future tax problem. This issue tends to show up most clearly for employees with concentrated company stock, investors with large non-retirement portfolios, and business owners planning an eventual exit. Paying tax on success is not a problem, but paying tax that could have been legally avoided is.

Arthur Godfrey once said, \u201cI\u2019m proud to pay taxes in the United States; the only thing is, I could be just as proud for half the money.\u201d1<\/sup> Most investors feel the same way. The question is whether there is a way to get market-like returns while intentionally generating losses to reduce tax liability.

That is where direct indexing enters the conversation.

Investing in a mutual fund or ETF that tracks an index is like fishing with a hook. You are trying to catch one big fish. When markets rise, you catch that fish and recognize a large gain. When markets fall, you may realize a loss if you sell while the entire fund is down.

Direct indexing is like fishing with a net. Instead of owning one fund, you own many individual stocks that make up an index. Some of those stocks go up, and some go down.

The losses from the stocks that decline can be harvested and used to help offset gains elsewhere.
You are still fishing in the same waters, but you have more flexibility in what you keep and what you release.<\/em><\/strong>

The S&P 500, for example, is an average of 500 large U.S. companies.2<\/sup> Even in strong market years, not all of those companies perform well. Direct indexing takes advantage of that dispersion.

By holding many individual stocks, investors can capture market-like returns while selectively realizing losses along the way.<\/em><\/strong>

Those losses can be valuable. They may offset gains from other investments, reduce taxable income, or be carried forward to offset future gains. For someone expecting a significant liquidity event down the road, this flexibility can be especially useful.

It is important to be clear about what direct indexing is not. It is not a solution for retirement accounts, where taxes are deferred or eliminated. It is not designed for small balances. And it is not guaranteed to produce tax losses every year. Like any investment strategy, it requires scale, patience, and thoughtful implementation.

Direct indexing is not meant to replace every other investment strategy. For investors facing large taxable gains, whether from company stock, a business sale, or years of accumulated growth, it can be a powerful way to stay invested while intentionally generating losses.

Taxes are one of the few investment drags we can plan for and partially control. Direct indexing doesn\u2019t eliminate them, but when used correctly, it can help smooth them out over time and allow more of your returns to stay where they belong: in your pocket.<\/p>\n\n\n\n

1 https:\/\/www.brainyquote.com\/quotes\/arthur_godfrey_108007
2 https:\/\/www.investopedia.com\/ask\/answers\/042415\/what-average-annual-return-sp-500.asp<\/p>\n\n\n\n

The S&P 500 Index is commonly used for the U.S. large-cap equity market. One cannot invest directly in an index. Past performance is not indicative of future results. Direct indexing seeks to track the performance of a specified index while allowing for customization and tax-loss harvesting. There is no guarantee that any tax benefits will be realized. The strategy may underperform or outperform the benchmark. Direct indexing typically involves higher costs, which may reduce net returns. Investing involves risk, including the potential loss of principal. Tax strategies, including tax-loss harvesting, are subject to applicable tax laws and regulations, which may change. This is for informational purposes only and should not be considered individualized investment, tax, or legal advice. Investors should consult their financial and tax professionals regarding their specific situation.<\/p>\n\n\n\n

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After several strong years in the market, many investors are sitting on sizable gains. When those gains live inside taxable accounts, they can quietly turn into a future tax problem….<\/p>\n","protected":false},"author":1,"featured_media":4209,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[741,7,8],"tags":[747,89,33,94,505,560],"class_list":["post-4208","post","type-post","status-publish","format-standard","has-post-thumbnail","category-741","category-money-moxie","category-newsletter","tag-direct-indexing","tag-investing","tag-mikal-b-aune-cfp","tag-stock-market","tag-tech","tag-utah-tech"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/smedleyfinancial.com\/wp\/wp-json\/wp\/v2\/posts\/4208","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/smedleyfinancial.com\/wp\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/smedleyfinancial.com\/wp\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/smedleyfinancial.com\/wp\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/smedleyfinancial.com\/wp\/wp-json\/wp\/v2\/comments?post=4208"}],"version-history":[{"count":3,"href":"https:\/\/smedleyfinancial.com\/wp\/wp-json\/wp\/v2\/posts\/4208\/revisions"}],"predecessor-version":[{"id":4218,"href":"https:\/\/smedleyfinancial.com\/wp\/wp-json\/wp\/v2\/posts\/4208\/revisions\/4218"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/smedleyfinancial.com\/wp\/wp-json\/wp\/v2\/media\/4209"}],"wp:attachment":[{"href":"https:\/\/smedleyfinancial.com\/wp\/wp-json\/wp\/v2\/media?parent=4208"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/smedleyfinancial.com\/wp\/wp-json\/wp\/v2\/categories?post=4208"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/smedleyfinancial.com\/wp\/wp-json\/wp\/v2\/tags?post=4208"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}