Investment Strategy2025-11-10
Year-End Portfolio Rebalancing and Tax Optimization Strategy
With 7 weeks left until the end of 2025, it is a critical time to focus on portfolio rebalancing and tax loss harvesting strategies. This article introduces practical strategies for reviewing target allocations with the rebalancing calculator and reducing taxes by selling losing positions.
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There are 7 weeks left until December 31, 2025. Year-end is the ideal time to review your portfolio and establish a tax strategy. With the S&P 500 up +22% year-to-date, many investors find their equity allocation has significantly exceeded their target, while certain sectors (Energy -3%, Materials -5%) have posted losses, creating tax loss harvesting opportunities. By rebalancing—selling some of the surging equities and shifting into bonds—and realizing losses to offset gains, you can reduce your capital gains tax liability. However, you must comply with the Wash Sale rule (no repurchase of the same security within 30 days of a sale) and adopt a strategy of substituting with similar ETFs to maintain market exposure. Use the asset allocation calculator to reset your 2026 target weights and the rebalancing calculator to build your year-end adjustment plan.
Reviewing 2025 Portfolio Performance
2025 was a strong bull market for equities, with most investors posting impressive returns. By asset class: the S&P 500 (SPY) gained +22%, driven by large-cap tech with a steady +15% in the first half and +7% in the second half; the Nasdaq (QQQ) surged +28%, achieving the best performance on the back of the AI and semiconductor boom; bonds (AGG) returned a modest +3%, constrained by interest rate volatility. Bitcoin rose +65%, benefiting from spot ETF approval; gold (GLD) gained +12%, lifted by geopolitical risks and central bank buying; and energy (XLE) fell -3%, the only sector in negative territory due to declining oil prices. As an example of how portfolio weights shifted: a portfolio that started the year targeting SPY 50%, AGG 30%, QQQ 15%, and gold 5% drifted to actual weights of SPY 54.5% (+22%), AGG 27.6% (+3%), QQQ 17.1% (+28%), and gold 5.0% (+12%) by year-end, with total equity exposure reaching 71.6%—exceeding the 65% target by +6.6 percentage points. The case for rebalancing: excess equity weight increases drawdown risk, meaning a -10% correction in 2026 would amplify losses; underweight bonds weaken portfolio defense and reduce diversification benefits; and sector imbalances from heavy technology concentration elevate volatility. Looking ahead to 2026 and target weights: entering the late cycle with expected growth slowdown and rising volatility, rate-cut expectations make bonds more attractive, and stretched valuations suggest moderating equity returns—making this the right moment to shift toward a more conservative portfolio. Recommended target weights: reduce equities from 65% to 60% (-5 pp) to lower drawdown risk; increase bonds from 30% to 35% (+5 pp) to strengthen defense; maintain alternative assets (gold, Bitcoin) at 5% to preserve diversification benefits.
Tax Loss Harvesting Strategy
Tax loss harvesting is a tax-reduction strategy that involves selling losing positions to offset realized gains. The basic principle: realized gains and realized losses are netted to reduce taxable net income; long-term gains (held over one year) are taxed at 15–20%, while short-term gains are taxed at ordinary income rates (22–37%); and loss harvesting can defer or permanently reduce your tax bill. A 2025 practical example: suppose you have realized gains of $10,000 from selling SPY (long-term, 15% rate) and $5,000 from selling QQQ (short-term, 22% rate), for total gains of $15,000 and an estimated tax of approximately $2,600. By selling losing positions—say $2,000 in XLE and $1,000 in XLI—you realize $3,000 in losses, reducing net gains to $15,000 – $3,000 = $12,000 and cutting the tax bill to approximately $2,100, saving about $500. The Wash Sale rule (U.S.): if you repurchase the same security within 30 days of a loss sale, the loss deduction is disallowed (does not apply in Korea, but relevant for U.S. residents or those using U.S. brokerage accounts). You must replace the sold security with a similar—but not identical—ETF to maintain market exposure (e.g., sell XLE, buy VDE), then you may repurchase the original holding after 31 days. Substitution strategy: replace losing positions with similar but distinct ETFs to avoid Wash Sale while keeping sector exposure intact. Examples: XLE (energy) loss → swap into VDE (alternative energy ETF); XLI (industrials) loss → swap into VIS (alternative industrials ETF); individual tech stock loss → replace with QQQ or XLK to maintain sector exposure. Key cautions: portfolio optimization should be the primary goal, not loss harvesting itself; if the sold security has strong long-term investment merit, consider repurchasing after 31 days; and always compare transaction costs against the tax savings to confirm a net benefit.
Year-End Rebalancing Action Plan
Year-end rebalancing should be executed in phases to reduce the risk of mistiming volatile markets. November (now): conduct a full portfolio review comparing actual vs. target weights by asset class; identify losing positions and select candidates for tax loss harvesting; and pinpoint positions with excess gains to plan partial profit-taking. December 1–15: execute loss sales first to lock in tax losses, immediately replace with similar ETFs to maintain market exposure, and partially reduce equity positions toward target weights—avoid liquidating entire positions. December 16–30: complete rebalancing by purchasing bonds and/or cash equivalents, finalize 2026 target weights, and review dividend reinvestment settings to activate automatic reinvestment. Practical example: suppose the current portfolio is worth ¥120,000,000 (SPY ¥65,400,000 at 54.5%, AGG ¥33,120,000 at 27.6%, QQQ ¥20,520,000 at 17.1%, XLE ¥960,000 at 0.8% at a loss). In November: sell all XLE (¥960,000), realizing approximately -¥1,040,000 in losses, and immediately buy VDE for ¥960,000 to retain energy sector exposure. In early December: sell ¥5,400,000 of SPY to reduce equity weight from 54.5% to 50% (approximately ¥1,000,000 of gains realized at +22% return), and sell ¥2,520,000 of QQQ to reduce tech weight from 17.1% to 15% (approximately ¥550,000 of gains realized at +28% return). In mid-December: buy ¥7,920,000 of AGG to increase bond weight from 27.6% to 35%, achieving a final portfolio of SPY ¥60,000,000 (50%), AGG ¥41,040,000 (34.2%), QQQ ¥18,000,000 (15%), VDE ¥960,000 (0.8%). Tax impact: realized gains of ¥1,550,000 (SPY ¥1,000,000 + QQQ ¥550,000) minus realized losses of ¥1,040,000 (XLE) = net gain of ¥510,000, reducing the tax bill by approximately 80%. This approach avoids the Wash Sale rule while maintaining energy exposure through VDE.
2026 Target Weights and Investment Strategy
2026 calls for a cautious approach as we enter the late economic cycle and the early phase of rate cuts. 2026 economic outlook: GDP growth slows to +1.5–2.0%, with declining consumption and investment; unemployment rises to 4.0–4.5%, cooling the labor market; inflation stabilizes at 2.0–2.5%, approaching the Fed's target. Rates are expected to fall 100 bp to 3.75% by year-end; equities face valuation headwinds with an S&P 500 total return of +5–8% projected; bonds are expected to benefit from rate cuts with AGG +6–8% and TLT +10–15% anticipated. Recommended portfolio weights by profile: Conservative (age 60s)—equities 40% (SPY 30%, defensive sectors 10%), bonds 50% (AGG 35%, TLT 10%, cash 5%), alternatives 10% (gold 8%, Bitcoin 2%), prioritizing stability and income; Balanced (age 50s)—equities 55% (SPY 40%, QQQ 10%, defensive sectors 5%), bonds 35% (AGG 25%, TLT 10%), alternatives 10% (gold 5%, Bitcoin 5%), balancing growth and defense; Aggressive (age 40s)—equities 65% (SPY 40%, QQQ 20%, growth sectors 5%), bonds 25% (AGG 20%, TLT 5%), alternatives 10% (gold 3%, Bitcoin 7%), actively pursuing long-term growth. 2026 investment strategy: increase allocation to bonds (AGG, TLT) to capture capital appreciation as rates fall; increase exposure to defensive sectors (healthcare, consumer staples, utilities) as a buffer against an economic slowdown; and expand dividend stock holdings (SCHD, VYM) for stable income and volatility reduction. Valuation guardrails: trim tech if Nasdaq P/E exceeds 35x; take partial profits in Bitcoin above $50,000; rebalance and lock in gains when equities surge more than +10%. Quarterly rebalancing: review target weights every three months, rebalance when allocations drift beyond the ±5–10 pp band, and use sharp drawdowns (–10% or more) as buying opportunities.
Using Rebalancing Tools and Year-End Checklist
Make full use of calculator tools for effective rebalancing. Rebalancing calculator: enter your current portfolio with exact holdings, amounts, and weights by asset; set 2026 target weights (equities 60%, bonds 35%, alternatives 5%); use the auto-calculated buy/sell amounts and securities to minimize adjustment costs. Asset allocation calculator: run scenario analysis to compare expected returns and volatility across conservative, balanced, and aggressive portfolios; assess risk by reviewing maximum drawdown (MDD) and volatility against your personal tolerance; and run long-term simulations to estimate portfolio value in 10 or 20 years for retirement planning. Year-end rebalancing checklist—Portfolio Review: compare actual vs. target weights by asset class; calculate returns by reviewing year-to-date gain/loss for each position; assess tax impact by estimating realized gains/losses and projected tax liability. Tax Loss Harvesting: identify losing positions with losses of –10% or more; prepare substitute ETFs by drafting a replacement list in advance; confirm Wash Sale rule compliance to avoid repurchasing within 30 days. Rebalancing Execution: sell losing positions first; partially sell equities to adjust weights; complete target weights by buying bonds/cash; optimize execution order factoring in commissions and taxes. 2026 Preparation: finalize target weights; activate automatic reinvestment for dividends and interest; set up a quarterly review schedule (March, June, September, December) with calendar reminders. Use the asset allocation calculator to simulate expected returns and maximum drawdown for your 2026 target portfolio, and use the rebalancing calculator to finalize your year-end adjustment plan—executing tax loss harvesting and weight adjustments simultaneously to build the optimal portfolio for achieving your 2026 investment goals.
Conclusion
Year-end is the ideal time for portfolio review and tax optimization. Rebalance by trimming surging equities and increasing bond exposure, while harvesting tax losses by selling underwater positions to reduce your tax bill. Use the rebalancing calculator to review your 2026 target weights and the asset allocation calculator to evaluate portfolio scenarios, so you can build a portfolio optimized for the late economic cycle.
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