Expected Loss Harvest from Tax-Loss Harvesting with Direct Indexing

Abstract

We study the ‘loss harvest profile’—the total cumulative losses and the contour of these cumulative losses—of direct indexing (DI) investment over time, focusing on two key drivers: volatility environment and cash contributions by the investor. Whether the DI investor overlaps with a bear market (with high volatility) initially is a critical factor that determines the total loss harvest potential for a lump-sum investor. Initial volatility environment is also a major determinant of the loss harvest contour the investor experiences several years into tax-loss harvesting. Additional cash contributions generally lessen the importance of the initial volatility environment in shaping the loss harvest profile.