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 Portfolio Tracker 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.
A worked example. You have $100,000 and a 70/30 target. After a strong run, it sits at $80,000 in stocks and $20,000 in bonds: 80/20. The target says $70,000 and $30,000, so you sell $10,000 of stocks and buy $10,000 of bonds. If you had $10,000 of new savings to add instead, you could put all of it into bonds: that gives $80,000 / $30,000, or about 73/27 on $110,000. You’re most of the way back without selling anything. A second contribution would finish the job.
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 realizes 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, realize the loss, and use it to offset realized gains elsewhere — including the gains your rebalancing sales just created. What happens to losses beyond your gains depends on the country. In the US, they can offset up to $3,000 of regular income a year ($1,500 if married filing separately), and the rest carries forward.1 In Canada, net capital losses can only offset capital gains, but they can be carried back three years or forward indefinitely.2 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 buy the same security (the US wording is “substantially identical”; Canada’s is “identical property”) within 30 days before or 30 days after the sale — a 61-day window, not just the month after.3 Both reach past the account you sold in. Canada’s version extends to your spouse and your registered accounts. In the US, buying the same fund in your IRA or Roth IRA triggers a wash sale too, and that loss is gone for good rather than deferred.4 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.
Sources
- IRS, Topic 409, Capital gains and losses. Short- vs long-term gains, 0/15/20% rates, the $3,000 ($1,500 married filing separately) loss limit.
- Canada Revenue Agency, Guide T4037, Capital gains. Inclusion rate, superficial losses, carrying net capital losses back three years or forward indefinitely.
- IRS, Publication 550, Investment income and expenses. Wash sales and “substantially identical” securities.
- Kitces.com, IRS Revenue Ruling 2008-5 explained. Repurchasing in an IRA or Roth IRA triggers a wash sale, and the loss is not added to the IRA’s basis.
Sources checked October 31, 2026. Figures change, so confirm with the source before acting.