To say that the S&P 500 has had a rocky start to 2025 would be an understatement.
The market has whipsawed around year to date, with news from tariffs, trade wars, DOGE, AI Investments, manufacturing commitments from Apple and TSMC, and uncertainty with continued inflation and Ukraine. While November 2024 through January 2025 resulted in a historically strong market based on economic optimism about economic growth under a new administration, February reminds us that expectations for the future can change with a few days of bad news, and it is essential to be a long-term investor.
Within a volatile market lies an opportunity for investors with a long-term outlook to stay the course, ride out the short-term cycles, and reap tax benefits along the way. M3 Family Office is proud to partner with Vanguard to offer Personalized indexing to our clients, which offers key tax advantages through a broad index approach that we will detail in this article.
How Investors Can Approach Volatility
No one has a crystal ball that can reliably predict the future. In a volatile market, it’s especially important to set your asset allocation based on your goals and risk tolerance, stay the course, and consider a broad index approach that rides through the storm.
While you can never know precisely when to get off or back on the bus, the data shows that staying the course will benefit you far more than trying to time the market.
Beyond adding stability, peace of mind, and an improved chance of long-term gains, there are other key benefits to staying the course when investing in a volatile market. For one, shares become “cheaper” as you buy the dips. Secondly, you can harvest tax losses through depreciated positions to offset income or other gains you had during the year.
If you invest in an index ETF (like VOO, which covers the S&P 500), tax loss harvesting opportunities are far and far between (since that requires the entire index to go down). Even in some of the best years, though, there are plenty of shares in an index that have gone down while the index is led upwards to a small collection of winning companies. For example, in 2024, there were a few companies with triple-digit gains, while many others suffered double-digit losses.
Long-term investors may wisely ride the wave upward, but even in the best years, they miss out on key tax loss harvesting opportunities within the index.
That’s where the M3 Vanguard’s personalized indexing technology comes into play.
How Personalized Indexing Presents Tax Opportunities to Investors
Personalized Indexing uses a new technology Vanguard made available to advisors to replicate indexes through a basket of individual shares in a separately managed account (SMA).
This goes far beyond simply purchasing shares to replicate an index yourself. Vanguard’s personalized indexing technology attempts to automatically replicate indexes of your choice, and optimize the tax benefits daily with minimal tracking error.
This results in a balanced portfolio with the finetuning from purchasing individual shares. This gives investors a few key advantages over just investing in ETFs:
- You can set market exposure and match a custom index with factor tilts. This can be especially useful if your net worth is heavily weighted toward one sector you wish to diversify.
- You can personalize an index to reflect your values and investment goals with ESG or faith-based, or investment factors such as dividend, growth, quality, or momentum.
- You can reap after-tax returns through automated tax optimization and tax-loss harvesting opportunities.
The purpose is not to time or outperform the market but to track an index’s performance and take advantage of tax loss harvesting from securities within that index throughout the year to offset income.
Recently, VOO dipped 2% amidst the latest news on tariffs while posting gains of 17% in the past year. Buy-and-hold investors benefit from a long-term approach that results in gross appreciation throughout the year. In contrast, investors who opt for personalized indexing can track the same indexes while harvesting losses.
M3 Family Office is Proud to Partner with Vanguard to Provide Direct Indexing
A long-term broad index approach may help you ride out short-term economic cycles, but investing in ETFS will also restrict you from certain tax advantages associated with owning individual shares.
In volatile markets, opportunities to harvest losses while remaining invested are plentiful. Through a personalized index with minimal tracking error, you can take a broad approach while gaining the fine-tuning necessary to harvest tax losses through short-term downturns.
At M3 Family Office, we prioritize establishing a comprehensive wealth plan that includes asset allocation, income and estate tax minimization, insurance planning, and general financial oversight. We coordinate the execution of nearly all aspects of your financial life, including implementing your investment strategy.
No one can predict the future, but you can plan for what may be and ride any wave that comes your way. Therefore, our place is not to speculate but to shepherd you through based on your planning needs and goals.
This information is general in nature and should not be considered tax advice. Investors should consult with a qualified tax consultant as to their particular situation.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.
The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance, and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
M3 Family Office LLC (“M3 Family Office”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where M3 Family Office and its representatives are properly licensed or exempt from licensure.