Most investors know they're supposed to rebalance their portfolios. Few actually do it well.

The standard advice is simple: rebalance once a year, or when your allocations drift 5% from your targets. That's fine for textbooks, but it ignores the messy reality of investing: tax implications, momentum that shouldn't be killed, and positions that deserve to die.

Today we're going into the nuanced art of portfolio rebalancing. Not the sanitized version you'd hear from a robo-advisor, but the practical tactics that can add meaningful returns over time.

In today's edition:

📊 Why calendar rebalancing often underperforms threshold rebalancing
💰 The tax-loss harvesting trick that turns losers into tax assets
🎯 When NOT to rebalance (momentum matters more than people admit)
🔄 How to rebalance without triggering wash sales
📈 Real examples: winners, losers, and what to do with each

Let’s begin.

Buffett-era investing was all about watching what companies are doing. The new era of investing is about watching what investors are doing.

Sure, you can still make good returns investing in solid businesses over decades. But in the meantime, you might miss out on some 224.29% gainers like Robinhood, which was the #6 most-mentioned stock on Reddit over the past 6 months.

Other examples:

All in all, Reddit’s top 15 stocks gained 60% over the past half year.

The S&P 500? 18.7% returns.

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The market is constantly telling us what stocks might pop off next. Will you look in the right places this time?

Most investors rebalance on a schedule. Once a year, once a quarter, whatever. It's simple and requires no monitoring.

But research suggests threshold-based rebalancing often performs better. Instead of arbitrary dates, you rebalance when positions drift beyond specific limits.

Here's why: calendar rebalancing can force you to sell winners too early or hold losers too long. If your tech allocation grows from 30% to 45% in three months, waiting nine more months to rebalance means you're deliberately ignoring your own risk parameters.

The threshold approach:

If you set a 25% position limit and Nvidia grows to 35% of your portfolio after its run to $4.5T market cap, that's a rebalancing signal, and it’s not because Nvidia's momentum is broken. It’s just because you're now overexposed to a single stock's fate.

Essentially, taking profits DOES NOT MEAN you’ve flipped bearish on a stock. It’s just smart!

Even QQQ rebalances (yes this is different from the above, but yes the principle applies to adjust when something weighs too much in your portfolio).

Here's where most rebalancing advice fails: it ignores taxes entirely.

If you're sitting on massive gains in a taxable account, mechanical rebalancing can trigger five or six figures in capital gains taxes. That's not portfolio maintenance—that's wealth destruction.

The tax-smart rebalancing hierarchy:

Let's say you're up 180% on Nvidia and it's now 30% of your portfolio when you wanted 20%. Instead of selling $50K of NVDA and paying 20% long-term capital gains tax ($10K to Uncle Sam), you could:

But that’s the easy stuff. What’s rarely talked about ⬇

This is the contrarian part that most financial advisors won't tell you: sometimes you should let your winners run longer than your target allocation suggests.

Signs you should delay rebalancing:

Strong momentum with clear catalysts. If you're overweight Nvidia because of genuine AI infrastructure demand (not just hype), there may be value in staying overweight for a quarter or two beyond your normal threshold

Tax timing near a calendar boundary. If you're two months away from long-term capital gains treatment (one year holding period), waiting could save you 17% in taxes (37% short-term vs. 15-20% long-term)

Sector rotation just beginning. If your defense stocks have grown from 10% to 18% but geopolitical tensions are escalating and earnings are strong, mechanical rebalancing might mean selling into the beginning of a multi-quarter trend

Positions with upcoming catalysts. You're overweight a biotech because of an FDA decision coming in six weeks. Rebalancing before that event might make sense (or might not, depending on your conviction)

The key is distinguishing between "overweight because of discipline breakdown" and "overweight because you made a good bet that's playing out."

Also, this is hilarious and true:

Here's a mistake even experienced investors make: they rebalance by selling a loser for tax-loss harvesting, then immediately use that cash to buy something similar.

The IRS wash sale rule says you can't claim a tax loss if you buy a "substantially identical" security within 30 days before or after the sale. This includes 30 days BEFORE, which catches people off guard.

You're overweight tech and underweight healthcare. You sell Kenvue (down 30% after concerns about autism links to Tylenol) for a tax loss. If the stock dipped even further, but you felt strongly that the stock had potential again and bought back for some reason within 30 days… that would be a problem.

Your loss would probably be disallowed, and you’d hate to miss out on that!

The workaround is simple and obvious: just set a reminder to not buy Kenvue within the next 30 days. (Side note, what a strange example, talking about selling and buying back into Kenvue within 30 days)

You bought Nvidia in early 2023. It's now above $180/share. What was 8% of your portfolio is now 28%.

Bad move: Sell enough to get back to 8% and pay massive capital gains taxes

Better move:

You bought Kenvue after the J&J spinoff. The autism concerns and RFK Jr.'s influence in the Trump administration has crushed the stock. It's down 40% and now represents 2% of your portfolio when you wanted 5% in consumer staples.

Bad move: Average down immediately because "it's cheap now"

Better move:

Your tech allocation has grown from 35% to 48% because several positions did well. But you're not overweight any single stock, just the sector as a whole.

Bad move: Mechanically trim every tech position equally

Better move:

Rebalancing is about maintaining the risk profile you actually want while maximizing tax efficiency.

The investors who succeed long-term are the ones who maintain discipline when discipline is hard.

If you're sitting on massive gains in Nvidia and can't bring yourself to trim even 5%, you might not be investing anymore. You might be gambling that one position will carry your entire financial future!

If you're holding Kenvue at a 40% loss because "it has to come back eventually," you're possibly ignoring both tax strategy and opportunity cost.

The best portfolio management is boring. It's the quarterly discipline to review, the tax calculations that save thousands, and the willingness to trim winners and cut losers according to a plan you made when emotions weren't running high.

Your target allocations exist for a reason. If you're not going to follow them, you don't need targets… you need a different strategy entirely!

That’s all for today’s special edition. We hope you got value from it. Reply and let us know if you did. 

Until next week,

— Brandon & Blake