Reduce Concentrated Positions Through Personalized Indexing

There are several different reasons why an investor has developed concentrated positions within their portfolio. Maybe they received stock options as part of their compensation. Or maybe they were an early investor in a company that’s seen substantial growth. Or they were gifted shares of stock.

Regardless of how the overconcentration happened, it can pose a serious risk to portfolios. As Vanguard noted: “When a client holds 10% to 20% or more of their portfolio in a single stock, their portfolio is vulnerable to single-stock events. If the company in question goes out of business or its stock declines in value, there goes a significant chunk of your client’s wealth.”

Now, the investor can sell that overconcentrated position. But that could result in a huge capital gains tax bill, especially if the stock has grown substantially. So, for clients with overconcentrated positions in their portfolios, direct indexing may help.

See more: “Direct Indexing: A Case Study

Diversify With Direct Indexing

In a direct indexing account, the investor owns individual stocks that represent a chosen benchmark index. But unlike a mutual fund or ETF, the investor directly owns each stock in their direct indexing portfolio. Direct indexing strategies like Vanguard Personalized Indexing help diversify concentrated positions in a tax-effective way.

VPI lets advisors customize portfolios to fit their client’s existing holdings and tax needs. And as the investor’s concentrated position is gradually diversified, VPI’s tax-loss harvesting feature can minimize tax costs.

Vanguard CEO Tim Buckley said at Exchange 2023 that the company will “be investing heavily” in direct indexing. More information about VPI can be found online.

For more news, information, and analysis, visit the Direct Indexing Channel.