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How investing pros turn losses into wins

In 2016, Buffett began accumulating positions in America’s airline companies. He deployed roughly $7 billion to $8 billion in Delta Airlines, American Airlines, Southwest Airlines and United Airlines. These investments failed to perform as anticipated and Buffett eventually sold them for a loss in 2020. However, these losses could have been used to lower Berkshire Hathaway’s tax liability.

How? It’s surprisingly simple.

You probably already know that the Internal Revenue Service (IRS) can levy taxes on profits from the sale of investment assets. But the IRS also allows investors to register capital losses, which can offset some of the gains and thereby reduce one’s tax bills.

This technique is called tax-loss harvesting. Some everyday investors and retail traders might already be aware of the technique but, because of the complexity involved, it often isn’t implemented.

This is the problem that Frec is designed to solve.

Direct indexing is the key

These days, a large majority of investors — amateur and professional alike — rely heavily on low-cost index funds and ETFs. Each of these products is a mix of stocks and other assets that come pre-bundled.

ETFs and index funds have plenty of advantages, but one disadvantage is that you can’t grab individual stocks from within the fund and sell them when they underperform. You can either hold the whole basket of assets or you can sell the whole basket.

Meanwhile high net worth individuals — not to mention hedge funds and other institutional investors — have the capacity to directly buy and sell large quantities of individual stocks, giving them the power to offset their taxable gains with strategic losses and thus to maximize their overall returns through tax savings.

Here’s how the Frec Direct Indexing harnesses a technique called “direct indexing” to put the power of advanced tax-loss harvesting in everyone’s hands.

How direct indexing works

Frec Direct Indexing enhances the traditional index ETF by buying all the stocks in an index individually and trading them algorithmically. In other words, you can invest in all 500 companies of an index like the S&P 500 and automatically harvest losses on the ones that drop.

The algorithm swaps out a losing stock for 30 days, then buys it back and books that loss as a tax deduction. This ensures that you keep tracking the performance of the S&P 500 while taking advantage of market volatility.

Direct indexing approach combines all the benefits of passive investing — low-cost, simplicity, consistency — with the added boost of tax-loss harvesting that was previously only available to big guys like Buffett.

“Investors want access to sophisticated investment products that are low-cost and easy to use,” says Mo Al Adham, Frec’s CEO. “Those products have traditionally only been available through expensive wealth advisers.”

With Frec, however, this process can be put on auto-pilot and the everyday investor can reap the benefits. Based on Frec’s simulations, users who incorporate tax-loss harvesting can generate up to 40% of their portfolios over a 10-year span. Thus, $100,000 invested in the S&P 500 with Frec Direct Indexing can deliver $40,000 in a potential tax reduction over a decade-long period.

“There is a lot going underneath the hood, but it’s all automated and done for you” with Frec, Al Adham says. "On the surface level, Frec Direct Indexing is similar to investing in an ETF — it’s an easy and quick way to get passive exposure to the broader market. Unlike ETFs, however, you get additional benefits in the form of tax savings and customization.”

Unlock the hidden gains in your ETF portfolio

Unlike an investor who purchases a traditional ETF through a brokerage, Frec users can add or remove specific stocks or sectors from their index investments. For instance, you could create a portfolio that tracks the S&P 500 but doesn’t track Tesla.

Users of the platform can also access a line of credit against the value of their portfolio to generate liquidity without triggering capital gains.

Since Frec’s process is automated, users don’t need to deal with the complexity of buying, selling and holding a portfolio of hundreds of stocks manually — and that reduces costs. Frec’s direct investing solution comes with a 0.10% annual fee, which is comparable to the 0.945% on the SPDR S&P 500 ETF Trust.

Frec’s fee is also significantly lower than most mutual funds and wealth managers, who often charge 1% on assets under management.

These impressive features won’t necessarily make you as successful as Buffett, but with Frec, your power to customize your portfolio — and supercharge your gains through tax savings — won’t take a backseat to any billionaire.

Try Frec

Vishesh Raisinghani Freelance Writer

Vishesh Raisinghani is a freelance contributor at MoneyWise. He has been writing about financial markets and economics since 2014 - having covered family offices, private equity, real estate, cryptocurrencies, and tech stocks over that period. His work has appeared in Seeking Alpha, Motley Fool Canada, Motley Fool UK, Mergers & Acquisitions, National Post, Financial Post, and Yahoo Canada.


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