How Should You Invest $10M+? Most Underutilized Strategy Revealed

If you have a $10M+ portfolio—or even less—you should consider direct indexing, an advanced investment strategy. Instead of owning an ETF or mutual fund like the S&P 500, direct indexing allows you to own individual stocks that make up the index, enabling more granular control. This approach unlocks powerful benefits, particularly through tax-loss harvesting. By selling underperforming stocks, locking in losses, and reinvesting, investors can offset gains elsewhere, reducing taxes without losing market exposure.

Direct indexing also offers flexibility for concentrated stock positions, charitable giving, or customizing portfolios to exclude certain sectors. Studies show this strategy can deliver “tax alpha,” boosting returns by 0.5%-1.85% annually over decades, without added risk.

While traditionally reserved for ultra-wealthy investors, advances in technology have made it accessible to portfolios starting at $500K. However, success requires sophisticated tools and tax expertise. If you meet criteria like high tax brackets or large unrealized gains, direct indexing could significantly enhance your long-term net returns.

Questions answered:
1. How can direct indexing and tax-loss harvesting improve investment returns without increasing risk?

2. Who benefits most from using a direct indexing strategy?

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⏱Timestamps:⏱
0:00 - The strategy - direct indexing
3:57 - Tax loss harvesting
7:22 - More than locking in losses
9:36 - The research
11:38 - An involved process
13:05 - Criteria 1, 2, and 3
17:04 - Criteria 4 and 5
19:52 - More accessible due to technology

[J--vi]

Thanks James!
Something important you mentioned but needs to be highlighted: As time goes on you will end up with large unrealized gains. Also, studies have shown that once you stop contributing new monies to the SMA (e.g., when you retire) the opportunities for the SMA to harvest loses diminish significantly, while you still have to pay the annual fee. You will also have to report yearly hundreds of trades that the SMA will be performing. Lastly, it will be very difficult to get out and disentangle the SMA in the future, as well as a tax nightmare, as you will end up with hundreds of stocks with mostly large embedded unrealized gains (not a problem if you end up donating it as you mentioned).
Not saying that SMAs are bad, but all of this needs to be considered.

[mjss]

@6:09

I thought that to get the full deduction for losses you had to take them against gains in the same year. If you don't you then only get the $3, 000 carry forward for, in the case of $250K losses taken, you have 80+ years of $3, 000 offsetting income or capital gains.

What am I missing?

[YokeRoel]

I don’t have 10million but I’m still gonna watch.

[janethunt]

Thank you for educating us. That would make me crazy.

[TrB]

Cool video! I learned a lot and appreciate your efforts :)

[famousquotes]

Once you start buying and selling individual stocks in sp500 you dont own the capital weighted index of sp500. You are just trading individual stocks. This is not index investing. Long term you will underperform the index.

[spinnetti]

This one was beyond me. Where/how do you track those losses? Where/how do you "bank" them?

[ChiraagLathia]

Thanks James for the video! - where is the link to the study?

[rickdeckard]

This works well. I know because I’m doing it. Capital gains no longer killing me.

[MichaelCorbett-tw]

James, Doesn't tax loss harvesting also increase your unrealized gains. That is, assuming you re-buy the same or similar equity, it will now have a lower cost basis. If it recovers and you sell, you will have more gains on which to pay taxes. As such, tax loss harvesting only really works if you can take those future gains in a year when you have a lower capital gains tax rate. Am I missing something?

[patienceisalpha]

TLH is great but the mess made from so many positions and the potential broker vendor lock in had me refrain from that.😅
Second reason is I try to track a much larger index (FTSE All World) so I would have to split what I can do with direct indexing (sp500) vs using an ETF for intl and small caps.
Anyways decided to go for simplicity, extremely low fees.

[buckwildz]

Eh, the benefit of tax loss harvesting is usually due to not actually being out the market since you buy immediately back in. 31 days later the equity you sold could have recovered some and you end up literally selling low and buying high.

It is market timing to a point. With an etf you can sell and buy immediately.

[evarlast]

You can't time the bottom to know when to take those losses without a crystal ball.

[KevinCollins]

Hi James, I'm 28 and recently inherited $250, 000 from my grandmother's estate after her passing. I'm not sure what to do with the money, and I'm feeling overwhelmed by all the options.

[lancobear]

What are your thoughts on owning gold as savings/ portfolio insurance?

[xxfearless]

Your shirt is hurting my eyes... 😅 it looks like it has some sort of reflective material?

[buyerclub]

First, I hope you, Ari, and your families and team members are staying safe out there. I saw Ari’s video yesterdayS, and it looks like you're all pretty close to the fires.

Second, I watched a lot of this video. Especially as I am close to the assets mentioned. But it got me thinking. Mostly in this video you are talking about tax avoidance strategies, and tax loss harvesting.

But the big question to me is, “ should that be our priority, avoiding taxes? “ The side effect of these situations for the wealthy is that it creates jealousy and resentment for those that are not able to take part. Worse, it creates a situation where even a progressive tax rate gets converted and the less wealthy are taxed at a rate lower than the more wealthy.

This resentment is so bad that many Republicans reps and senators are suggesting eliminating the current income tax and replacing it with a “consumption” tax. (Which would be extremely non progressive and much more of a burden on the percentage of income for the less wealthy, who spend much more of their income than the wealthy does.)

What I would hope is that we find a way to simplify the tax code. Not make incentives for generating losses, and having to deal with “wash sales’ and the like. IF you think something you purchased is not a good investment now. You should be able to sell it, but not necessarily use that loss to offset gains on other things you sell that would be profitable.

Think about it. If you made two investments and both went up. You would have generated income So you pay taxes on that income. If you have one that goes up as much as the othe one goes down. Then no income. You are exactly where you are. And if you had two that went down, you also would not have income. And you would take that loss, only when you are convinced that investment no longe makes sense.

What do you think?

[nathanielphanosmith]

Interested in this paper, I can’t find the paper on google. I think you forgot to link it in the description.

[darrenweston]

Fidelity have an SMA option but you need $100k min. Great if you are high income individual with lots of non-retirement investment. Great tax savings.

[datbio]

With tax loss harvesting, you will pile up a huge unrealized gain in your SMA stocks. What are you going to do with those gain in future??