By Adrian Colarusso, CFA, CFP®
February 3, 2023
There I was. The produce section. Next on the list: one papaya.
When I pick a papaya, I have a stack-ranked list of characteristics to look for.
My first filter is for a pale ring around the stem. Specimens without this ring will never ripen.
Then, I look for color. Like bananas, most papayas ripen from green to yellow, peaking out at half-green, half-yellow. Usually, I’m lucky to find one that’s not so deep green, a sign it will ripen nicely.
This recent papaya was already almost fully yellow – a rare gem.
Then, I noticed its shape. It was squatter than the others, almost like a gourd. I wasn’t sure what to make of that, but since it had the most clearly defined ring of the bunch, I decided to give it a go.
It was better than candy.
Martha Stewart offers an ode to papaya – their health benefits and her tips to enjoy them – here.
Papaya selection and wealth management?
In a previous newsletter Four Investment Extremists, I called out “Bogelheads Gone Blind” for their one-dimensional approach to investing – simply buy and hold low-fee broad-based market ETFs.
There is nothing wrong with this approach. In fact, it’s a core component of our strategy at Target Rock. But it’s like suggesting one only eat apples and avoid papayas, because the latter are more expensive and it’s all too easy to pick a lousy one.
The stakes are much higher than picking a bad piece of fruit, of course. The consequences of subpar investment selections cost untold billions in high fees, poor performance, and unexpected outcomes.
So how do we explore the enticing cornucopia of investment options while minimizing mistakes?
It takes some work. We must check out the whole produce section for the ripest fruit, understanding nutritional benefits, taste, price, and more, to build a diverse, healthy diet.
Papayas were hardly on my radar a couple years ago, but I’m glad I discovered how to pick a good one.
The Next Big Thing – Direct Indexing
ETFs have exploded in popularity over the last 15 years, and their inclusion in an investment portfolio is now conventional wisdom.
We believe direct indexing amplifies the best of ETFs for certain investors – those with:
- Taxable investment accounts (e.g. non-retirement investments)
- Appreciated assets on their personal balance sheets
- Unique circumstances and preferences that require customization
Here’s an article that explains how it works.
Take the year 2020 as an example. The S&P 500 returned 18%. However, 38% of the companies in the index were down for the year.* If you only owned an S&P 500 ETF, you would have no opportunity to tax loss harvest – where you sell securities at a loss, on purpose, but you aren’t sad about it.
Direct indexing opens up much more granular tax loss harvesting opportunities.
The power lies in owning a representative sample of the individual stocks that make up an index, and frequently scanning for ways to harvest losses while maintaining tight performance tracking to the index.
Harvested losses can offset gains in other highly appreciated assets, punting your tax liability into the future and shifting it to a more diversified basket of stocks.
Another benefit is the ability to customize a portfolio for unique preferences or circumstances.
Clients who have stock compensation may want to dial their own industry exposure down in the rest of their portfolio and lean into other industries that counterbalance the unique risks in theirs.
Others might have specific ESG investment criteria they want to overlay, with precise visibility into the potential risk and return implications.
At Target Rock, we’ve invested in technology to provide custom direct indexing for our clients in-house, with no additional fees paid to outside managers.
To explore if this solution makes sense for your situation, we hope you’ll reach out.