Once a household has $2 million, $5 million, $10 million or more in investable assets spread across multiple account types, the investment question stops being simply “how do I get broad market exposure at the lowest cost?” and becomes something more nuanced.
Taxes, concentrated positions, retirement income sequencing, Roth conversions, Required Minimum Distributions, Medicare premiums, charitable giving, estate planning, and the specific needs of a surviving spouse all interact with investment decisions in ways that matter at this level of wealth.
That doesn’t mean high-net-worth investors need complicated investments. In fact, some of the most thoughtfully constructed portfolios use straightforward low-cost ETFs for significant portions of the portfolio. The difference between a good high-net-worth investment strategy and a mediocre one isn’t complexity for its own sake. It’s intentionality: knowing exactly why each investment is in the portfolio, in which account, in what amount, and what problem it’s solving.
The Three Questions Every High-Net-Worth Portfolio Should Answer
Before choosing any specific investment, it helps to separate three questions that are often conflated.
The first is what to own: the asset allocation question covering stocks, bonds, international equities, small companies, value stocks, real assets, and cash equivalents. The second is how to own it: the implementation question covering ETFs, mutual funds, individual securities, direct indexing, separately managed accounts, or some combination. The third is where to own it: the tax location question covering taxable brokerage accounts, Traditional IRAs, Roth accounts, HSAs, trusts, and other account structures.
A portfolio can be well diversified but poorly implemented. It can be tax-efficient but poorly diversified. For high-net-worth retirees, all three decisions matter significantly, and they interact with each other. The optimal implementation of a given strategy depends partly on which account holds it, and the optimal account structure depends on what’s being held in it.
Why Simplicity Still Matters
There’s an understandable assumption that a sophisticated investor needs sophisticated investments. Often the opposite is true.
Broad, low-cost ETFs remain one of the most efficient investment vehicles available. They provide exposure to thousands of companies or bonds in a single investment, carry low expense ratios, offer daily liquidity, and make rebalancing straightforward. For many portions of a high-net-worth portfolio, there’s no good reason to pay more simply because someone has more money.
A retiree with $8 million in an IRA invested in low-cost diversified ETFs can have an excellent portfolio. The account doesn’t generate the kind of ongoing capital gains tax liability that a taxable brokerage account does, so many of the advantages associated with owning individual securities directly become less important. The complexity costs of a more sophisticated strategy inside an IRA can exceed the benefits.
The same investor might manage their taxable account very differently, and that’s appropriate. The best investment implementation often depends on the account in which the investment sits. Recognizing where simplicity adds value and where it creates an opportunity cost is itself a form of sophistication.
How Low-Cost ETFs Serve Retirees in Retirement Accounts
Within pre-tax retirement accounts like Traditional IRAs and 401(k)s, low-cost ETFs are often an effective tool.
Inside a pre-tax account, there are no capital gains taxes when you sell. Rebalancing doesn’t create a taxable capital gain. Tax-loss harvesting doesn’t apply because losses inside the IRA don’t provide a tax benefit. The entire account balance is eventually taxed as ordinary income when withdrawn, so the primary investment objectives are diversification, appropriate risk, expected return, and cost.
A diversified mix of low-cost equity and bond ETFs can accomplish this efficiently. Broad international exposure, bond duration calibrated to the retirement timeline, and a disciplined rebalancing approach are what matter inside the retirement account. Adding complexity that doesn’t improve the investor’s after-tax outcome is unnecessary friction.
For Roth IRAs, the case for low-cost ETFs is similarly strong, though with a different consideration. Higher-growth assets can have a strong case for Roth placement because their future appreciation can compound without creating taxable withdrawals, although the appropriate allocation depends on the household’s broader tax and withdrawal strategy.
The Taxable Account Is Where Strategy Matters Most
Once a household has a meaningful taxable brokerage account, the investment approach can and often should be different from what’s used in the retirement accounts. The taxable account has something the IRA doesn’t: an immediate and ongoing tax consequence attached to many investment decisions.
Capital gains realized in the taxable account are generally subject to tax. Dividends and interest may also create taxable income. Every decision about when to sell, which tax lots to use, and how to rebalance can have a direct tax consequence that reduces after-tax returns. At $1 million or more in a taxable account, these decisions can become significant in dollar terms rather than merely theoretical percentages.
This is where direct indexing, separately managed accounts, and systematic tax-management strategies can become valuable rather than unnecessarily complex.
Direct Indexing: Owning the Stocks Instead of the Fund
Traditional index investing means purchasing a fund that owns a basket of securities. With an S&P 500 ETF, you own shares of the fund, and the fund owns the underlying stocks. With direct indexing, the investor owns individual stocks directly in a separately managed account designed to approximate a particular benchmark or investment universe.
That distinction becomes especially meaningful for high-net-worth investors for two related reasons: tax management and customization.
When you own an index fund, you’re insulated from the individual performance of each stock within it. When you own the individual stocks, you can see and act on the fact that some are up and some are down, even when the index as a whole is rising. During the fourth quarter of 2023, while the S&P 500 gained 11.7%, 178 individual companies in the index declined in value. An investor who owned those individual stocks directly could potentially harvest losses from the declining positions while maintaining broadly similar market exposure.
This is the core of tax-loss harvesting at the individual security level: selling positions that have fallen below their cost basis, replacing them with other securities that maintain similar market exposure, and generating a realized loss that can offset capital gains or, subject to applicable limitations, a limited amount of ordinary income.
The benefit isn’t a free lunch. You’re generally changing the timing of taxation rather than eliminating it. You’re recognizing a loss now in exchange for a lower cost basis in the replacement investment, which can result in a larger taxable gain later. But for investors in high tax brackets, the ability to manage the timing of taxation can have meaningful long-term value when applied systematically over many years.
Direct indexing isn’t automatically better than an ETF. Its potential benefit depends on the size of the taxable portfolio, the amount of unrealized gains and losses, the investor’s tax rate, available harvesting opportunities, and the value of customization. For a relatively straightforward taxable account with little in unrealized gains, the additional complexity may not justify itself. For a large taxable portfolio with substantial embedded gains or concentrated positions, the calculation can look very different.
Direct Indexing Goes Beyond Tax-Loss Harvesting
Tax efficiency gets most of the attention in discussions of direct indexing, but customization can be equally important for some high-net-worth households.
An investor who works for a technology company already has significant human capital tied to that sector. Adding a technology-heavy index fund to their portfolio compounds an existing concentration rather than diversifying it. Direct indexing can potentially construct a portfolio that underweights or excludes the technology sector while maintaining broad market exposure.
An executive who holds $1 million or more of company stock through equity compensation doesn’t necessarily need additional exposure to that company through an index fund. A customized portfolio can exclude the company specifically, allowing diversification around the concentrated position without requiring an immediate sale.
Other potential customization uses include excluding specific industries, avoiding companies in a sector where the investor already has private business exposure, accommodating certain ESG-related preferences, or managing around existing positions that carry large embedded gains.
These exclusions aren’t free. Every restriction creates some degree of tracking difference relative to the underlying index. The investment decision should therefore be based on whether the restriction solves a meaningful problem and whether the tradeoff is worth making.
Factor Investing and the Evidence-Based Approach
Factor investing involves intentionally emphasizing characteristics of companies that academic research has associated with differences in expected returns over long periods. The most commonly discussed equity factors include value, size, profitability, and momentum.
Rather than trying to predict which individual companies will outperform, a factor-based strategy systematically increases exposure to particular characteristics across a diversified portfolio. A value strategy may emphasize companies with lower prices relative to measures such as earnings or book value. A profitability strategy may favor companies with stronger operating profitability. A small-cap strategy places greater emphasis on smaller companies.
Dimensional Fund Advisors, widely known as DFA or Dimensional, is one of the most prominent investment managers built around this framework. Dimensional’s investment philosophy is grounded in academic research, including foundational work associated with Eugene Fama and Kenneth French on the systematic drivers of expected equity returns. The firm emphasizes dimensions including company size, relative price, and profitability in its equity strategies. What distinguishes this approach from traditional active management is that it isn’t trying to predict which individual companies will outperform. It’s building systematic exposure to characteristics that research has historically associated with better long-term expected outcomes, applied consistently across broadly diversified portfolios.
Dimensional’s separately managed account platform extends this approach to individually owned securities with meaningful customization capabilities, including the ability to accommodate restrictions at the individual security, industry, sector, and country level. For a high-net-worth investor with concentrated positions, existing sector exposure, or specific exclusion requirements, this combination of systematic investment philosophy and individual-level customization can be genuinely useful.
The tradeoff is equally important to understand. Factor premiums are not reliable from year to year, and they can disappear or reverse for extended periods. A value-oriented portfolio can significantly underperform a broad market index when large growth companies are leading the market. A strategy that emphasizes profitability or smaller companies can likewise experience long stretches in which the expected premium is not apparent in the results.
For retirees, this makes implementation and expectations particularly important. A factor allocation should be treated as a long-term component of the investment strategy rather than a prediction about what will outperform next. Investors need to understand the potential tracking difference from a traditional market-cap-weighted portfolio before they experience it, because understanding it after the underperformance has already occurred doesn’t help an investor stay the course.
When Does Sophisticated Portfolio Management Become Worthwhile?
There isn’t a single asset level at which an investor suddenly needs a more sophisticated investment strategy. The need for customization depends on the household’s circumstances.
Sophisticated portfolio management can become increasingly valuable when an investor has $1 million or more in taxable investment assets, significant unrealized capital gains, concentrated employer or company stock, multiple taxable and retirement accounts, a high marginal tax rate, large planned Roth conversions, significant RMDs, charitable giving goals, a need for customized withdrawal planning, business interests or other assets that affect the overall portfolio, or estate-planning considerations that influence the investment strategy.
A household doesn’t need every one of these characteristics to benefit from customized management. The important question is whether the additional complexity solves a meaningful problem in that specific household’s situation.
A $5 million portfolio consisting of one taxable account and one IRA invested in diversified ETFs may require less customization than a $2 million portfolio containing concentrated stock, substantial embedded gains, multiple retirement accounts, and a large upcoming Roth conversion opportunity. The objective isn’t to make the portfolio more sophisticated. It’s to make the strategy more appropriate to the investor’s circumstances.
Managing Concentrated Positions
High-net-worth investors frequently arrive at retirement with a problem that generic asset allocation models don’t address: they already own too much of something. An executive with $1.5 million in employer stock, a business owner who sold a company and retained equity, or a long-tenured employee who accumulated restricted stock over decades all face a version of the same challenge.
Selling the concentrated position immediately is often the cleanest answer from a diversification perspective. In practice, it can generate a substantial tax liability when the position has a very low cost basis, and it may conflict with legal restrictions or the investor’s desire to manage the tax impact over multiple years.
The alternative is to manage the rest of the portfolio around the concentration. If the investor already has $1.5 million in a technology company, the advisor can reduce or eliminate technology exposure elsewhere so that the overall portfolio carries a more appropriate sector mix even with the concentrated holding. Over time, as shares can be sold within a reasonable annual tax budget, the concentration can potentially be reduced systematically rather than abruptly.
Customized separately managed accounts or direct-indexing strategies can be particularly useful in these situations because the portfolio can be constructed around existing holdings rather than treating the investor as though they were starting from scratch.
Asset Location: Matching Investments to Accounts
Once the portfolio becomes large enough to span multiple account types, where each investment is held can become nearly as important as what it holds.
The general principle is that investments generating ordinary income, such as many bonds and REITs, are often better suited for tax-deferred accounts like Traditional IRAs where the income isn’t creating an annual taxable event. Tax-efficient investments with relatively low turnover and long-term capital appreciation are often better candidates for taxable accounts. Higher-growth assets can have a strong case for Roth accounts because qualified withdrawals are tax-free, although the right decision depends on the household’s overall tax and withdrawal strategy.
For a household with $2 million in a Traditional IRA, $1.5 million in a taxable account, and $500,000 in a Roth, the same underlying asset allocation can produce different after-tax outcomes depending on which assets are held in which accounts. A bond allocation sitting in the taxable account generates interest that may be taxed annually. The same bonds sitting in the IRA generally defer that taxation until withdrawals occur. Over a long retirement, these location decisions can matter more than small differences in fund expenses.
Bonds and Fixed Income in a High-Net-Worth Retirement Portfolio
Bonds serve a different purpose in a retirement portfolio than equities, and the right implementation depends on what that purpose is.
For a retiree drawing on the portfolio for income, the bond allocation can provide stability, a source of spending funds during equity downturns, and diversification against the volatility of a stock-heavy portfolio. During a significant equity decline, having a bond allocation to draw from can reduce the need to sell equities at depressed prices, which is an important consideration in managing sequence of returns risk.
Broad bond ETFs or mutual funds provide efficient, low-cost exposure to diversified fixed income. They’re liquid, inexpensive, and easy to rebalance. For much of the bond allocation in a retirement portfolio, this may be appropriate.
Individual bonds can make more sense when the goal is to match specific future cash needs. A retiree who needs $100,000 per year for the next five years can build a bond ladder with maturities aligned to those needs, providing greater certainty about when principal will be returned regardless of what interest rates do in the interim.
Municipal bonds are worth considering for investors in higher federal tax brackets. Interest from qualifying municipal securities is generally exempt from federal income tax, which can make their after-tax yield attractive compared with taxable bonds of similar quality and duration. The analysis requires looking at the taxable-equivalent yield, which adjusts the municipal rate for the investor’s marginal federal and state tax rates. For a Colorado resident in a high bracket, the after-tax comparison can sometimes favor appropriately selected municipal bonds.
Why Retirees Often Need More Tax-Aware Portfolios Than Accumulators
Retirement introduces a set of constraints and interactions that don’t exist during the accumulation phase. A retiree is simultaneously spending from the portfolio, managing taxes, handling RMDs, optimizing Social Security timing, monitoring Medicare premiums, conducting Roth conversions when appropriate, and planning for an eventual estate transfer. The investment portfolio has to work alongside all of those objectives rather than operating independently.
This is why a retiree with $10 million shouldn’t necessarily have the same portfolio they had at 55 simply because the asset allocation hasn’t changed. The retirement income plan determines when and from which accounts money is withdrawn, and those decisions interact directly with the investment strategy.
The investments are one piece of the plan. The retirement withdrawal order, the Roth conversion strategy, the Social Security timing, and the investment portfolio all need to be designed together.
Building a High-Net-Worth Retirement Portfolio in Practice
A practical example helps illustrate how these pieces fit together. Consider a couple, both age 65, retiring with $5 million in investable assets: $1.5 million in a taxable brokerage account, $2.5 million in Traditional IRAs, $750,000 in Roth accounts, and $250,000 in cash.
The taxable account could use a direct-indexing or customized separately managed account strategy that creates opportunities for individual-security tax-loss harvesting, maintains broad market exposure, and potentially excludes any sector or company where concentration already exists. This account benefits from individual-security management in a way the retirement accounts generally don’t.
The Traditional IRAs could use low-cost diversified ETFs alongside a modest factor-tilted allocation, depending on the couple’s objectives, risk tolerance, and investment horizon. Tax-loss harvesting doesn’t apply inside the IRA, so the focus shifts to diversification, expected returns, implementation, and cost.
The Roth accounts could hold a higher-equity allocation with a greater emphasis on long-term growth, since qualified withdrawals are tax-free and compound without future tax drag.
The cash reserve handles near-term spending needs, reducing the need to sell equities at an inopportune time.
What to Be Skeptical Of
Sophisticated investing doesn’t mean buying every sophisticated product. High-net-worth investors are frequently approached with strategies that sound compelling but don’t necessarily solve a meaningful problem.
Be cautious of high-cost active funds that haven’t demonstrated consistent after-expense outperformance. Be skeptical of complex structured products with fees embedded in the structure rather than disclosed clearly. Private investments available only to accredited investors aren’t inherently better because of their exclusivity. Thematic ETFs built around recent trends can introduce concentration and higher turnover costs. Excessive factor tilts that deviate dramatically from broad market exposure introduce meaningful tracking risk that many investors may abandon at exactly the wrong time.
The question for any investment isn’t whether it’s sophisticated or exclusive. It’s whether it solves a specific problem in the investor’s portfolio and whether the cost is justified by the benefit.
Why Professional Management Adds Value at This Level
For a household with a $5 million+ portfolio spanning multiple account types, the investment decisions can’t reasonably be separated from the tax and planning decisions. Every transaction in the taxable account can have a tax consequence. Every Roth conversion changes the withdrawal strategy. Every RMD can affect taxable income and potentially Medicare premiums. The portfolio is a financial system, not a collection of investment accounts.
At Inclinevest, we approach investment management as one component of the broader financial plan. For clients with straightforward portfolios, that may mean primarily low-cost diversified ETFs managed with discipline and a clear asset-location strategy. For clients with substantial taxable assets, concentrated positions, significant unrealized gains, or more complex tax circumstances, we may incorporate direct indexing, separately managed accounts, systematic factor strategies, or customized tax-management approaches.
Gabriel Motta, CFP®, is a retirement financial advisor in Greenwood Village, Colorado, working with pre-retirees and retirees in the five to fifteen years before and after retirement who want an investment strategy that works in coordination with their broader retirement income plan. If you’re managing a complex portfolio and haven’t examined whether the investment strategy is optimized alongside your tax and income planning, that conversation is worth having. You can start that conversation, or review our investment philosophy and services and fees.
Frequently Asked Questions
What is direct indexing and who benefits from it? Direct indexing means owning individual stocks that make up an index directly in a separately managed account rather than owning a fund that holds them. It can be particularly valuable for investors with large taxable accounts who may benefit from tax-loss harvesting at the individual-security level, investors who want to exclude specific companies or sectors, and investors with concentrated positions they want to manage around. The potential benefit depends on the investor’s tax situation, portfolio size, unrealized gains, and customization needs.
What is factor investing and should retirees use it? Factor investing involves systematically emphasizing characteristics such as value, company size, profitability, or momentum that research has associated with differences in expected returns over long periods. Factor strategies can complement broad-market investing, but they can also underperform broad benchmarks for extended periods. Retirees considering factor exposure should understand the potential tracking difference and have sufficient time horizon and risk tolerance to remain invested through periods of underperformance.
Should I use ETFs or individual stocks in retirement? It depends on the account and the purpose. Inside tax-deferred accounts like Traditional IRAs, low-cost ETFs are often highly effective because the tax benefits of individual-security ownership are limited. In taxable accounts with meaningful balances, individual securities or direct indexing can potentially add value through tax-loss harvesting and customization. Many high-net-worth portfolios use both, with the implementation matched to the specific account and its tax characteristics.
What is a value tilt and should I have one? A value tilt means intentionally overweighting companies with lower prices relative to measures of their fundamentals compared with a market-cap-weighted index. Research has historically associated value characteristics with higher expected long-term returns, but the premium can be absent or negative for extended periods. A value tilt may be appropriate for investors who understand and can tolerate periods of underperformance relative to the broad market and have a long enough horizon to remain invested.
How does tax-loss harvesting work and how valuable is it? Tax-loss harvesting involves selling investments at a loss to generate a realized capital loss, then reinvesting in similar but not identical securities to maintain market exposure. The realized loss can offset capital gains and, subject to applicable annual limits, a limited amount of ordinary income. For investors with substantial taxable portfolios, systematic tax-loss harvesting can add meaningful after-tax value over time, primarily by managing the timing and deferral of taxation rather than eliminating tax permanently.
What is asset location and why does it matter? Asset location refers to which investments are held in which account types. Investments generating ordinary income, such as many bonds, are often better suited for tax-deferred accounts. Tax-efficient investments with relatively low turnover and long-term capital appreciation are often good candidates for taxable accounts. Higher-growth assets can have a strong case for Roth accounts because qualified withdrawals are tax-free. Getting asset location right can improve after-tax outcomes without changing the portfolio’s overall risk allocation.
Key Takeaways
- High-net-worth investing in retirement requires coordinating the investment strategy with the tax and income planning. The portfolio can’t be designed in isolation from RMDs, Roth conversions, Social Security, Medicare premiums, and withdrawal sequencing.
- Low-cost ETFs remain excellent investment tools for much of a high-net-worth portfolio, particularly inside tax-deferred retirement accounts where the tax benefits of individual-security ownership are limited.
- Direct indexing can provide tax-loss harvesting at the individual-security level and customization around specific stocks or sectors. It tends to become more compelling as taxable assets, embedded gains, and customization needs increase.
- Factor investing can provide systematic exposure to characteristics such as value, size, and profitability, but investors need to be prepared for potentially long periods of underperformance relative to a broad market index.
- Asset location, matching investments to the appropriate account type, can add meaningful after-tax value without necessarily changing the portfolio’s overall risk allocation.
- Concentrated positions should be managed systematically over time, with the rest of the portfolio constructed around them rather than ignoring them.
- The right portfolio for a high-net-worth retiree is the one that’s appropriate for their specific tax situation, account structure, income needs, estate goals, and risk tolerance, not the most complex one available.
About the Author
Gabriel Motta, CFP®, MBA, is the founder and principal of Inclinevest LLC, a fee-only fiduciary retirement financial advisor and financial planner based in Greenwood Village, Colorado. He works with pre-retirees and retirees throughout south Denver, across Colorado, and nationally, including clients in Highlands Ranch, Centennial, Lone Tree, Aurora, Parker, Castle Rock, and Littleton. As a retirement planner and wealth manager, Gabriel helps clients navigate retirement income planning, Social Security strategy, tax-efficient withdrawals, and investment management. Gabriel is a NAPFA and XY Planning Network member. Learn more at inclinevest.com or schedule a conversation.
Sources
- IRS, “Topic No. 409: Capital Gains and Losses” — https://www.irs.gov/taxtopics/tc409
- IRS, “Publication 550: Investment Income and Expenses” — https://www.irs.gov/pub/irs-pdf/p550.pdf
This article is for general informational and educational purposes only. It isn’t personalized investment, tax, or legal advice, and it shouldn’t be relied on as a substitute for guidance specific to your situation. References to specific investment managers and strategies are for educational purposes and do not constitute an endorsement or recommendation. All investing involves risk, including potential loss of principal. Past performance of any investment strategy does not guarantee future results. Inclinevest LLC is a registered investment adviser. Registration doesn’t imply any level of skill or training. Please consult a qualified professional before making decisions about your own financial circumstances.
