Tax Strategies for Concentrated Portfolios: What Smart Investors Are Doing

After several strong years in the market, a lot of investors are sitting on something they didn’t have to think about much a few years ago: large embedded gains. Some of those gains are long-term, and some, thanks to explosive growth in a handful of holdings, are not. Taxes have always been part of investing, but in a concentrated market they can become a material number.

On the latest episode of Quarter Over Quarter, Don Drury, Tom Moran, and Charlie Chesebrough, CFA, head of quantitative strategies, walk through the tax strategies they discuss with clients most often. They agree on one starting point: you shouldn’t let the tax tail wag the dog, but you can’t brush it aside either.

Harvesting, Direct Indexing, and a “Plus” Version

Tom starts with the strategy he’s used for years and says is getting harder every year, and Charlie explains how it works differently when a client arrives with a portfolio they can’t easily touch. Then Don asks for another approach, and Charlie introduces direct indexing, which he describes as a process that has been around a while. Don breaks down how it works in plain English, with an example involving two familiar soft drink brands.

Tom has a favorite variation he calls “direct indexing plus,” and it raises the question Don asks out loud: why would anyone want to invest in something where the focus is losses? The answer involves a limitation of the standard approach, a form of leverage Tom is candid about not loving, and what it means for investors holding concentrated, low-basis positions.

Giving, Gifting, and Planning Ahead for an Estate

Not every strategy is about the portfolio. Tom and Charlie discuss a simple tool for charitably inclined investors that Charlie says many people think is too complicated, and which he says is easier than most expect, as long as clients don’t wait until the last week of December. Don adds another giving vehicle that can help in a year when income has been unusually high.

The conversation then turns to larger estates and what changes when an investor is over a certain threshold. Tom points to a few approaches worth discussing early, including one that involves moving money to a different type of account and paying tax on your own terms rather than someone else’s. He also describes an unusual situation involving senior living costs and a deduction he pairs with another strategy.

Why Planning Beats Preparing

Don draws a distinction he says he’s seen over the years between a CPA who prepares taxes and one who plans for them, and Charlie has a candid take on how often those planning conversations really happen. Tom explains why the best time to have them is much earlier in the year than most people think.

There’s also the human side. Charlie and Tom share stories about investors who hold on to losing positions for emotional reasons, and Tom explains why he thinks that kind of loyalty can be costly. The episode closes with the one number Tom says every investor should be focused on.