In recent years, we have seen spectacular growth in a select group of companies, creating a true fortune for those who had the vision to invest in names like NVIDIA, Apple, Palantir, Amazon, Google, Broadcom, and a few others.
To give you an idea of the sheer magnitude of this growth, just look at these values:
- NVIDIA: If you had invested $10,000 on the last trading day of 2020, your investment would be worth approximately $116,300 by the end of 2025.
- Palantir: Looking at the same case, if you had invested $10,000 on the last trading day of 2022, your investment would be approximately $75,477 by the end of 2025.
- Apple: Being one of the most impressive scenarios, if we take a 20-year horizon instead, someone who invested $10,000 in 2005 would have a balance of $1,112,529.
(Source: Yahoo Finance and Gemini Calculations)
Now, the big question that many who are about to retire or are already retired ask themselves is: Should I start selling these shares to cover my retirement? And if I do, is there anything I can do to avoid such an enormous tax bill?
This is a typical case where having more money can become a “problem.” A pleasant problem, of course, but a problem nonetheless, because every time you make a withdrawal, a large chunk goes toward taxes.
The Tax Reality
As some of you may know, investors will pay what is called Capital Gains Tax. While this can be significantly lower than the ordinary income tax you might pay (which can range from 10% to 37%), capital gains rates go from 0% to 20%, with 15% being the most common.
To keep in mind how these taxes work: they are calculated based on the difference between what you paid for the shares, your cost basis, and their current value.
Let’s take our example: the Apple investor put in $10,000 (their cost basis), and the market value today is $1,112,529. This means that if they sold all their assets, they would have to pay taxes on $1,102,529, which represents more than 99% of their investment. In this particular case, the tax rate for a large portion of this amount would be 20%, plus an additional tax called the Net Investment Income Tax (NIIT) of 3.8%.
What can you do?
What can this investor do if they need to use this money, perhaps in stages, or if they are worried that, with all the changes in the world of AI, they don’t know if these companies will still be market leaders in 10 or 20 years?
By the way, if some of you are thinking, “Maybe it makes more sense to just leave them there so my beneficiaries can inherit them,” you are right. They would benefit from the Step-Up in Basis and wouldn’t have to pay capital gains for all those years of growth. It is undoubtedly a good option, as long as you don’t need the money and have the certainty that those companies will always be there.
Custom-Indexing: The Modern Solution
Custom-Indexing (also called Direct-Indexing or Personal Indexing) might be the solution. First of all, it’s important to define what it is and why it’s so “trendy” lately.
Previously, this was an investment strategy that only multi-millionaires could access through family offices. Fortunately, technology now allows these strategies to be within reach of most investors, although access is still usually through an investment advisor.
What does Direct-Indexing consist of?
The vast majority of investors today invest in what are called Index Funds, which, as you well know, are like a “box” where you can buy, all at once, the shares of the 500 largest companies in the U.S. This offers broad diversification at a low cost.
Now, suppose I told you: Why not, instead of buying a box that has the shares of these 500 companies, we buy the 500 individual stocks one by one and try to copy the S&P 500 index ourselves?
The first thing that surely comes to your mind is: “Why would I want to do that if I can just buy an ETF that does it for me, without all the work and the tax implications of buying and selling all those assets?” Plus, it could mean you need a substantial amount of money to buy them all (upwards of $128,000 at today’s prices).
The Answer is Simple: Tax Harvesting
If it has so many complications, why would anyone want a strategy like this? The answer is simple: not all 500 companies go up in value in a single year. A substantial percentage of them generate losses that you could “harvest” and use later against your capital gains.
During 2025, the S&P 500 index grew approximately 17.9%. But within that growth, we can see that 181 stocks had a loss instead of a gain. In some cases, these were very significant losses, for example, Adobe dropped about 25%.
The principle behind Custom-Indexing is that by creating the index yourself using mega-computers, you can harvest part of these losses to use in the future when you decide to sell those shares that have a substantial gain, like the ones we mentioned at the beginning of this blog.
Of course, it’s not just about harvesting losses. The challenge for these mega-computers and your investment advisor is to take advantage of these losses while making sure you don’t miss out on the gains you would have obtained by investing in the index.
In Summary
Investors use custom indexing to gradually sell these high-gain stocks and cover the losses with the gains harvested through their personalized index. This has the added benefit of moving from a highly concentrated position in a small group of stocks to a portfolio with high diversification.
By the way, this type of strategy is not only used to optimize capital gains from stocks, but also, for example, in real estate. A simple example of this would be those of you living in Coral Gables, Florida, who perhaps bought your houses 20 years ago for $200,000 or $300,000, and today they are worth several million. You might want to move to a smaller house, but don’t do it just to avoid paying so much in taxes. This is where Personal Indexing can help you in the medium term to build up losses to take advantage of in the future.
Custom-indexing reminds us that not all losses are bad, and that with a good strategy, they can be optimized.
Ready to Unlock Your “Golden Handcuffs”?
Managing a concentrated portfolio of mega-winners requires more than just watching the market; it requires a proactive tax and diversification strategy. If you are sitting on significant gains and want to explore how Custom-Indexing or Personal Indexing can help you protect your wealth while reducing your tax bill, let’s talk.
Whether you are here in Boca Raton or anywhere across the United States, I am here to help you navigate these complexities with a plan tailored to your life and your values. Thanks to modern technology, we can work together seamlessly regardless of your location.
Don’t let taxes dictate your retirement. Schedule a complimentary consultation today.
