Is Custom Indexing Worth It? | Ask a Savant Financial Advisor
Video Transcript
Custom indexing has gained attention as a potential game-changer for your personal investment strategy, But how do you know if custom indexing is a good strategy for you?
In this video I’m going to highlight some potential benefits of custom indexing, identify common misconceptions, and help you evaluate this option. But before we begin, I want you to go to savantwealth.com/guides and download our Financial Advisor Evaluation Checklist. If you’d like professional advice about your investment strategy, this checklist can help you understand the criteria you should consider when choosing an advisor. Now let’s get started.
So what is custom indexing? Well, if you think of an index fund as a basket of individual stocks, custom indexing simply means that you’re in control of what goes in the basket! In short, it’s a personalized investment strategy that lets you pick and choose stocks based on your goals, personal values, or tax needs while still maintaining the convenience and broad diversification of a standard index fund.
Custom indexing isn’t just about tracking well-known indices like the S&P 500—it can be used to invest across all market caps and regions. This may offer additional opportunities for tax-loss harvesting and portfolio diversification.
A common misconception about custom indexing is that it’s only for the ultra-wealthy or that it’s purely about lowering taxes. In reality, custom indexing can be accessible to other investors. And it’s not just about potentially reducing taxes—it’s about personalization and optimization.
Perhaps one of the most appealing benefits of custom indexing for investors is the ability to customize investments based on their personal values, such as environmental, social, or faith-based investing. It can also be used to help diversify concentrated stock positions in a tax-efficient way, which can be especially helpful for individuals holding large amounts of a single stock, like in the case of company stock options or inherited positions.
If you’re charitably inclined, custom indexing may offer tax benefits for both you and your chosen charity. For example, if you have highly appreciated stock holdings, you can transfer those directly to charities, with the goal of avoiding capital gains taxes and helping to optimize the value of your gift. This can be beneficial for both your financial situation and your charitable goals.
While custom indexing has the potential to offer many benefits, it’s not without drawbacks and is not suitable for all investors. It can be more expensive due to higher fees and trading costs, and it requires a deeper understanding and ongoing attention. There are also tax considerations to manage and potentially less diversification compared to traditional index funds, which could increase risk. Plus, customizing your portfolio can be time-consuming and may need regular adjustments to stay aligned with your goals.
So at the end of the day, is custom indexing worth it? My goal is to help investors answer this question by starting with a thorough evaluation of their goals, financial situation, tax considerations, and long-term objectives. I listen closely to their needs—whether that’s tax efficiency, diversifying a concentrated position, or integrating personal values into their portfolio. Once we understand what matters most to them, we carefully weigh the costs and benefits to evaluate whether a custom indexing strategy may be appropriate and aligns with their overall financial plan.
My name is Zach and I am a Financial Advisor and the Chief Investment Officer with Savant Wealth Management. If you’re interested in exploring custom indexing as a part of your investment strategy, I encourage you to get in touch.
C. Zach Ivey
Chief Investment Officer
CFA®, CFP®, MBA