In the Intermediate course you designed an allocation on purpose — so much in stocks, so much in bonds, jobs assigned to every holding. Here is the inconvenient truth about that beautiful plan: it starts dying the day you fund it. Not because you did anything wrong, but because markets move and your weights move with them. This lesson is about the two maintenance disciplines that keep a portfolio true to its design — rebalancing — and, along the way, turn your losers into a tax asset: harvesting.
Drift: the silent reallocation
Say you built 70% stocks / 30% bonds. Stocks have a great two years and double while bonds sit still. Congratulations — and notice what happened: you are now roughly 82/18. Nobody made that decision. The market rewrote your risk level while you slept, and it always rewrites it in the same direction: whatever has been winning becomes a bigger and bigger share of your portfolio, concentrating you in the most-loved (and often most expensive) asset right before the season turns — you know from Lesson 4 how that goes.
Rebalancing is the fix: periodically selling some of what grew overweight and buying what fell underweight, back to target. Look at what that mechanically forces you to do: sell what has run up, buy what has lagged. Sell high, buy low — executed by rule, with zero forecasting, at exactly the moments your emotions would vote loudest for the opposite. That is the quiet genius of it. Rebalancing is not primarily a return-maximiser; it is a risk-restorer that happens to have contrarian discipline built in.
When: calendar, threshold, and the free lunch
- Calendar rebalancing — once or twice a year, on a date you pre-commit to. Simple, forgettable-proof, and infrequent enough to keep costs low. For most people, entirely sufficient.
- Threshold rebalancing — act only when a weight drifts, say, 5 percentage points from target. More responsive, requires occasional checking — our shows your current weights whenever you look.
- New money first — the free lunch. If you contribute regularly, point every new dollar at whatever is underweight. You drift back to target without selling anything — which means without triggering a single taxable gain. For anyone still in their saving years, this should be the workhorse; selling is the tool you reach for only when new money cannot close the gap.
What rebalancing is not: a reaction to headlines, a hunch about the cycle, or a way to act on nerves. If you find yourself “rebalancing” every month, you are trading with extra steps.
Where you do it matters
Inside tax shelters — TFSA, RRSP, Roth, 401(k), the wrappers from the Intermediate course — rebalancing is free of tax consequences: sell, buy, no bill. So do your heaviest rebalancing there. In a taxable account, every sale of a winner realises a capital gain, and that changes the calculus — which is exactly where the second discipline comes in.
Tax-loss harvesting: the consolation prize with cash value
Some of your holdings will be down. That is not a character flaw; it is statistics. Tax-loss harvesting turns the paper loss into money: sell the loser, realise the loss, and use it to offset realised gains elsewhere — including the gains your rebalancing sales just created. Depending on your country, excess losses can often offset some regular income or carry forward to future years. The loss was always real; harvesting simply moves it onto your tax return, where it works for you.
The catch every jurisdiction polices: you cannot sell, bank the loss, and buy the same thing straight back. The US wash-sale rule and Canada’s superficial-loss rule both disallow the loss if you repurchase the same (or an identical) security within 30 days — and Canada’s version extends to your spouse and your registered accounts. The standard play is to hold something similar but not identical for the window (a different broad-market ETF, for instance) so you stay invested while the clock runs. Miss the rule and the harvest was theatre.
The tail and the dog
One warning ties this lesson together: never let the tax tail wag the investment dog. Holding a deteriorating stock purely to avoid a gains bill, or selling a compounder you believe in purely to bank a loss, is letting a discount dictate the decision. Taxes are a cost to manage, not a strategy. The order of operations is always: decide what the portfolio should look like (Lessons 1–5), then execute that decision in the most tax-efficient way available (this lesson and the next).
Speaking of the bill itself — how big is it, actually? What you keep after tax is the only return that counts, and that is Lesson 7.