Holiday errands crowd calendars, but one task deserves a prime slot: rebalancing your portfolio. Markets rarely move in lockstep. When winners run and laggards slump, your carefully chosen mix drifts.

A simple year-end reset can realign risk, capture tax benefits, and set a steadier course for next year—without guessing what markets do next.

Asset Mix

Rebalancing means restoring your target allocation across stocks, bonds, cash, real estate funds, or other holdings. If stocks fell more than bonds, a 70/30 plan might have slid to 62/38. Left alone, that creeping shift changes your risk level. Rebalancing pushes your portfolio back to the risk you originally planned to take.

Why Year-End

Year-end concentrates three advantages. First, markets have delivered a full year of dispersion, so drifts are meaningful. Second, many investors review finances now, creating a natural trigger. Third, rebalancing pairs well with tax-loss harvesting to potentially reduce your upcoming tax bill while tightening risk controls.

How To Rebalance

Start with your written targets (for example, 70% stocks, 25% bonds, 5% cash). Compare current weights. Trim what’s above target and add to what’s below. Prioritize tax-advantaged accounts for trades to avoid capital-gains taxes. If using taxable accounts, favor selling positions with losses or long-term gains first.

Always confirm settlement times and any trading fees.

Smart Thresholds

Calendar rebalancing works, but thresholds add discipline. A common rule is “5/25”: rebalance when an asset class drifts by 5 percentage points or 25% of its target, whichever is greater. Example: a 20% target for bonds would trigger action if bonds move outside 15%–25%. Thresholds reduce churn and keep decisions consistent.

Tax-Loss Harvesting

Rebalancing creates a perfect moment to harvest losses. Realized capital losses can offset realized capital gains. If losses exceed gains, up to $3,000 can offset ordinary income this year; remaining losses carry forward indefinitely. Harvesting turns lemons into future tax lemonade while keeping your allocation on target.

Avoid Wash Sales

To keep harvested losses deductible, avoid buying the same or “substantially identical” security within 30 days before or after the sale. Replace with a similar—not identical—holding.

Examples: swap a single-stock position for a diversified sector ETF; exchange one total-market fund for a large-cap blend fund with a different index; or use a temporary tilt and rotate back after 31 days.

Location Matters

Place less tax-efficient assets (like taxable bond funds, REITs) inside tax-advantaged accounts when possible. Keep tax-efficient index funds and broad ETFs in taxable accounts. During rebalancing, shift exposure between accounts to improve “asset location” without changing your overall target mix.

Behavioral Edge

As Benjamin Graham, the father of value investing, famously said: “Individuals who cannot master their emotions are ill‑suited to profit from the investment process.”

Rebalancing enforces “buy low, sell high” at the portfolio level. Selling a strong performer can feel wrong; adding to a laggard can feel worse. A rules-based process removes emotion, replacing hunches with a checklist. Over time, that discipline is a quiet compounding engine—especially during volatile years.

How Often

Pick a cadence you’ll follow. Quarterly or semiannual checks are common; annual is fine if you also use thresholds. Too frequent trading can trigger taxes and friction; too infrequent increases drift. Document your rule and stick to it, adjusting only if your goals, time horizon, or risk tolerance truly change.

Common Mistakes

Don’t rebalance blindly across accounts—mind tax lots and holding periods. Don’t chase what just rallied; rebalancing is not momentum trading. Don’t ignore cash flows: directing new contributions to underweight areas can rebalance with fewer taxable sales. And don’t forget that large distributions from funds near year-end can affect your tax picture.

Extra Opportunities

Year-end is a natural time to pair rebalancing with other smart moves. Max out workplace plans and IRAs if possible. Consider a charitable gift of appreciated securities instead of cash to avoid capital gains and secure a deduction if eligible. Review emergency funds so you aren’t forced to sell investments at a bad time.

Simple Checklist

- Confirm targets.

- Export holdings and weights.

- Identify drifts beyond thresholds.

- Harvest losses where appropriate.

- Select replacement funds to avoid wash sales.

- Trade in tax-advantaged accounts first.

- Redirect new contributions to underweights.

- Document changes and schedule the next review.

Conclusion

A year-end rebalance is small effort with outsized impact: tighter risk control, cleaner taxes, and a plan you can actually follow. Ready to run your numbers now—and lock in a calmer, more intentional starting point for the new year?