There’s a change coming in the way many of us will invest in the coming years. But for background, it’s important first to look at a related—though seemingly mundane—investment concept known as tax-loss harvesting.

To understand how tax-loss harvesting works, we can look at a simple example. Suppose you purchased a stock for $10, and it subsequently dropped to $8. On the one hand, that would be unfortunate, but there would be a silver lining: You could sell the stock to capture the $2 loss for tax purposes then reinvest the proceeds in another stock.

Like most topics in personal finance, tax-loss harvesting is the subject of some debate. Detractors argue that the tax benefit is something of an illusion. Here’s how they look at it: Continuing with the above example, critics would point out that a tax-loss harvesting trade would cause the investor’s cost basis to drop, and that, in their view, would negate any benefit.

Why? The new stock’s basis would be $8, whereas the original stock’s basis was $10. That’s important because it means that when the new stock is eventually sold, the taxable gain will be $2 greater than the gain would’ve been on the original stock. And that additional $2 of gain would perfectly offset the $2 loss that was captured earlier. It’s for this reason that some compare tax-loss harvesting to a shell game: They argue that it can shift a gain from one year to another, but never truly eliminate it. And thus, they feel, tax-loss harvesting doesn’t really provide any benefit.

In a narrow sense, the critics do have a point. But there are many cases in which harvesting losses can yield tangible benefits. Suppose you’re in retirement and taking regular withdrawals from your portfolio. In that situation, tax-loss harvesting could help you moderate the capital gains on those withdrawals.

Continuing with the example from above, if you took a $2 loss on one investment, you could pair that with a $2 gain on another investment, and that would allow you to free up cash from your portfolio without any net tax liability. In that way, tax-loss harvesting can help retirees keep a lid on their tax bills when drawing down on a taxable account.

Even before retirement, tax-loss harvesting can be a benefit. That’s because even the most dedicated buy-and-hold investor will want to make changes to their investments from time to time, if only for rebalancing. And that’s another key benefit of tax-loss harvesting. It can help investors rebalance—and thus manage risk—more tax-efficiently.

Those are the benefits of tax-loss harvesting. But you might notice a fly in the ointment. After the strong market we’ve enjoyed over the past decade, it might be hard to find holdings with any losses to harvest. Over the past 10 years, the S&P 500 has risen 250%. Even international stocks, which are seen as laggards, have gained nearly 70% over that period. That would appear to be an obstacle to tax-loss harvesting. In other words, it’s hard to harvest losses if there are no losses to harvest. For index fund investors, this is indeed a challenge.

But now imagine that if, instead of owning a broad-market index like the S&P 500, you instead owned each of those 500 stocks individually. Then, as you looked across your portfolio, there would be both winners and losers. While Nvidia has gained 25,000% over the past 10 years, stocks like Walgreens, Warner Brothers and American Airlines have each dropped more than 50%. Forty stocks, in fact, have lost money over that period. And nearly 300 of the 500 stocks in the S&P index have gained less than the index’s overall average. If you owned these stocks individually, they would thus offer opportunities to take withdrawals from a portfolio more efficiently than if you owned the index only in the form of a fund.

Wouldn’t it be cumbersome, though, to own all 500 stocks individually? That brings us to a strategy known as direct indexing. In short, it’s a way to own the individual stocks in an index, and to conduct regular tax-loss harvesting, without needing to manage the portfolio yourself. Direct indexing has existed for decades, but in the past, it made sense only for the wealthiest investors because of the cost.

In recent years, however, brokerage commissions have largely been eliminated, and new competitors—including Vanguard—have helped bring down the cost. As a result, these services now cost as little as 0.15% or 0.20% per year. Yes, that’s more than a comparable index fund. But according to at least one study, the tax benefits can easily offset that cost.

In addition to the tax benefit, direct indexing offers two other benefits. First, it offers the ability to customize a portfolio. Suppose there’s an industry that runs counter to your values—tobacco, for example. With a direct indexed portfolio, you could own all of the stocks in the S&P 500 with the exception of Altria and Philip Morris. The result: You’d have your own custom S&P 498. With direct indexing, you could also overweight selected industries.

Another benefit of direct indexing: Suppose you have a large holding in a single stock—Apple, for example. Because of the risk, you might want to diversify. But if you bought an S&P 500 index fund—ordinarily a good way to diversify—that would pose a problem, because 7.6% of any dollars invested in the S&P 500 would be allocated to Apple, increasing your exposure further.

With direct indexing on the other hand, you could construct a portfolio that included all of the stocks in the index except Apple. A further benefit: Over time, losses produced by the direct indexing strategy could be used to offset gains as you whittled back on your Apple shares.

Are there downsides to direct indexing? As noted earlier, there’s the cost. And some people dislike the idea of holding hundreds of individual stocks; it seems messy.

Another downside of direct indexing is that the tax benefits are front-loaded. Over time, as the market rises, there are naturally fewer losses available to harvest. However, I believe direct indexing can continue to provide tax benefits far into the future. Even if, after a decade or two, most stocks in a portfolio are at gains, there will always be some stocks that have gained more than others.

Result: At any given time, if you were looking to take a withdrawal, there would still be a tax benefit even if none of your holdings had losses. You could cherry pick from among your holdings to limit the gains on each sale. And to meet charitable goals, you could donate the most appreciated shares, such as Apple or Nvidia, to charity, thus sidestepping the gains.

Another potential risk with direct indexing is that a portfolio can ossify over time. Without the benefit of new cash, the ability to make changes can become constrained by unrealized gains. And this can cause a direct indexed portfolio to slowly drift away from its benchmark. This is where mutual funds have an advantage. Because there are always investors coming and going, mutual funds have the benefit of being able to deploy new cash on a daily basis, and that gives them the ability to stay right in line with an index.

For these reasons, I don’t recommend direct indexing as a substitute for index funds, but I do see it as a good complement. It is, I think, a strategy now well worth considering.​