Jan 1, 2024

New at Plenty

Direct indexing explained: the investing strategy of the wealthy

Emily Luk

CPA, CFA - CEO and Cofounder of Plenty

Here’s the scoop — good investing is boring investing. The key? Invest early, often, and buy the market.

Fun fact: Warren Buffet once made a $1M bet that an index fund (ie. a buy and hold strategy) would have higher returns than Wall Street traders and hedge funds trying to 'beat the market’.

He was right and won ... 10 times over.

Wall Street has a dirty, unacknowledged secret: More than 80% of traders on Wall Street are underperforming compared to index investing. And it's not just Wall Street. In 2022, individual hobby investors who picked their own stocks had a 44% loss compared to the S&P 500 index loss of 20%.

Investment managers for the wealthy have known this for decades and developed an ‘advanced’ form of indexing for their clients, called direct indexing. At Plenty, we believe that wealth building shouldn’t be a privilege — so we’re bringing the products of the 1% to the rest of us.

TL;DR: Direct Indexing

1. Is a higher-returning way to invest in the market
2. Has similar risk to regular ETF investing
3. Lets you invest based on your values

Let’s start with the basics of direct indexing

An index fund (aka ETF or exchange traded fund) is like a one-stop shop of stocks, bonds, and investments designed to match the returns of a popular index — like the the S&P 500. Think of an index fund as a basket that holds all those investments.

You can buy shares of that whole basket. That way, if a single company in your basket goes bankrupt, your whole basket doesn’t drop to $0 — it just loses a bit of value. There are many types of ETFs: domestic US company ETFs, tech-focused ETFs, international company ETFs, bond ETFs, and more. Companies like Wealthfront and Betterment allow you to invest in 5-10 different ETFs to create a balanced portfolio.

That’s what “diversifying” your portfolio means.

It’s a way to reduce your risk. The more you spread out your money, the less likely a dip in one part of the market will tank your entire portfolio.

Index investing is popular, and chances are you’re familiar with it.

Index funds and ETFs are popular because they charge lower fees and have better long-term track records than stock picking and most active fund managers.

The thing about ETFs … is that they were basically the 'innovation' that allowed us regular people to invest like rich people.

Why? Because we couldn’t afford to directly own all the stocks in an ETF. If you were to buy 1 share of every stock in the S&P 500, you’d need $85,985 — and that’s without properly balancing your whole portfolio to reduce your risk.

But, what is direct indexing?

For decades, when the everyday person was purchasing ETFs, the wealthy were using direct indexing. With direct indexing, you invest directly in individual stocks instead of the basket, like a mutual fund or ETF. If you had enough money, it made sense to hire someone to do this for you, and you didn’t worry about the trading fees.

Over the past 10 years, companies like Robinhood and Square Cash drove trading fees to $0 and introduced fractional shares. At Plenty, we’re combining the $0 trading fees, fractional shares, and improvements in algorithmic trading to now make direct indexing accessible for everybody — not just those with personal investment managers. 

Why is direct indexing better?

Good question. Direct indexing has a few benefits:

  1. Lower taxes (via tax-loss harvesting…another secret of the wealthy).

  2. Lower ETF fees (avg. ETF fee was 0.24% in 2022). 

  3. Personalization for people who care about what their money supports.

Did we lose you at taxes? Stay with us!

When you invest, you make money when your investment goes up. That’s the name of the game, after all. When you sell for a profit, you have to pay taxes and what's leftover is called your after-tax gain. 

Since we all want to make more money, in order to increase your after-tax gains, you can either:

  1. Increase how much you make; or

  2. Decrease your taxes

So, why own individual stocks? Well, even the most successful investors know not every investment is a winner all the time. In markets where stocks go up and down a lot (aka volatile markets - like the one we're in now), tax-loss harvesting becomes a strategy you can use to your advantage. With tax-loss harvesting, you’re strategically using losses to lower your tax liability both now and in the future.

Even though ETFs could hold hundreds of stocks, you’d need the entire ETF to drop before you could create a loss to use. Holding individual stocks gives you way more tax-saving opportunities because you’re “harvesting losses” at the individual stock level.

We’ve maximized tax-loss harvesting* across your portfolio to automatically look for opportunities every week, adding roughly an extra 2-4% on top of your portfolio’s after-tax returns. That means lower taxes and more money in your pocket. We have a lot more to say if you’re curious to learn more about tax-loss harvesting.

Where do values come into this?

Did you know Blackrock and Vanguard are the two largest investors in for-profit prisons and detention centers in the US? When you are investing in ETFs, you had no say in what was included. Oil and gas? Probably included. For-profit prisons? Check. Payday lenders? Check. 

But when you’re investing directly in stocks (aka direct indexing), we give you the ability to effortlessly fine tune your portfolio. You can choose to invest or not invest in industries and values that are important to you.

When you invest in companies that support and reflect your values, you’re not just lending a hand to those businesses — you're enabling the positive change and progress you want to see in the world.

About Us

We are an investment platform designed specifically for couples to build wealth, together. We go beyond budgeting, making it simple to invest, save and grow towards your future goals by unlocking access to the financial strategies of the wealthy. Ready to get started? Sign up for your free trial today.

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If you're a big reader like we are, you might want to learn more! Here are a few more references we like:

Direct Indexing Growth Projected to Outpace ETFs, Mutual Funds, and Separate Accounts Over Next Five Years, According to Cerulli

Direct indexing reduces taxes, According to Morgan Stanley

What Is Direct Indexing? | Russell Investments

Historical or hypothetical performance results are presented for illustrative purposes only. Tax-loss harvesting involves certain risks, including the risk that the new investment could have higher costs than the original investment and may introduce portfolio tracking error into your accounts. There may also be unintended tax implications. Prospective Clients should consult with their tax or legal advisor prior to engaging in any tax-loss harvesting strategy. Neither Plenty nor its subadvisor provide tax or legal advice. Tax-loss harvesting may not be suitable for every investor and may have limited or no impact in retirement accounts. For example, tax-loss harvesting may not materially benefit investors in low income tax brackets. Please see general disclosures here.


Emily Luk

CPA, CFA - CEO and Cofounder of Plenty

Emily is the ceo and cofounder of Plenty. Started by a husband and wife team, Plenty is a wealth platform built for modern couples to invest and plan towards their future, together. Previously, she was VP of Strategy and Operations at Even (acquired by Walmart/One) and a founding team member of Stripe's Growth and Finance & Strategy teams. She began her career as a VC, and was one of the youngest nationally to complete her CPA, CA and CFA designations.

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