You carefully choose a mix of stocks, bonds and cash that reflects your goals and comfort with risk. Then markets move.
Some investments rise faster than others. New contributions accumulate in one account. Dividends remain in cash. Before long, the portfolio you own may look different from the one you intended to build.
Rebalancing your portfolio means bringing those investments back toward your target allocation. It is routine portfolio maintenance—not a prediction about which market will perform best next.
A practical rebalancing process can help you:
- keep your portfolio aligned with your risk tolerance;
- prevent one asset class from quietly becoming too dominant;
- invest new money more deliberately;
- reduce emotional decisions during market highs and lows;
- maintain the diversification your financial plan depends on.
The goal is not to keep every percentage perfectly fixed. It is to keep the portfolio close enough to your plan that it continues to serve its purpose.
What does portfolio rebalancing mean?
Your asset allocation is the percentage of your portfolio invested in different asset classes, such as stocks, bonds and cash.
Suppose your target allocation is:
- 70% stocks;
- 25% bonds;
- 5% cash.
If stocks outperform bonds, your portfolio might eventually become 78% stocks, 18% bonds and 4% cash.
The portfolio has grown, but it has also become more exposed to stock-market declines. Rebalancing would involve directing money toward bonds and cash, selling some stocks, or using a combination of both until the allocation moves closer to the target.
The Ontario Securities Commission’s investor education website explains that rebalancing helps restore an investment mix to the allocation chosen for an investor’s objectives, time horizon and risk tolerance. It also notes that frequent trading can increase costs, so investors do not need to react to every small movement. You can read its overview of the benefits of rebalancing.
Rebalancing starts with the right target
Before changing your investments, confirm that the target itself still makes sense.
Your allocation should reflect:
- what the money is for;
- when you expect to need it;
- how much loss you can financially withstand;
- how much volatility you can tolerate without abandoning the plan;
- the stability of your income and emergency savings;
- other assets or pensions that affect your broader financial position.
If your circumstances have not changed, market performance alone is usually not a reason to replace your target. The purpose of rebalancing is to maintain the plan through changing markets.
However, a different allocation may be appropriate if your goals, timeline or ability to take risk have materially changed. For example, money that will soon be needed for a home purchase or retirement income may require a different mix than money with a 25-year horizon.
If you are uncertain about your target, begin with your investment risk profile and review how stocks, bonds and cash behave before placing trades.
How often should you rebalance your portfolio?
There are three common approaches.
Calendar-based rebalancing
With calendar-based rebalancing, you review the portfolio on a regular schedule, such as once or twice a year.
You might choose a memorable date, the beginning of the year or the same month as your annual financial review.
This approach is simple and discourages constant monitoring. The Ontario Securities Commission notes that rebalancing once or twice a year may be sufficient for many investors.
The limitation is that a major change can occur between scheduled reviews. A calendar tells you when to look, but it does not necessarily tell you when a trade is needed.
Threshold-based rebalancing
With this method, you rebalance when an asset class moves outside a predetermined range.
For example, a portfolio with a 70% stock target might use a five-percentage-point band:
- no action while stocks remain between 65% and 75%;
- consider rebalancing if stocks fall below 65% or rise above 75%.
Five percentage points is only an example. A suitable threshold depends on the portfolio, trading costs, taxes and how much deviation you are willing to accept.
Thresholds allow normal market movement without triggering unnecessary trades.
A combined approach
A combined system works well for many do-it-yourself investors:
- Review the portfolio once or twice a year.
- Rebalance only when an asset class has moved outside its permitted range.
- Use new contributions and available cash before selling investments.
This creates a repeatable process without requiring daily attention.
How to rebalance your portfolio step by step
Step 1: Write down your target allocation
Your target should be clear enough to guide a decision.
For example:
| Asset class | Target |
|---|---|
| Canadian stocks | 20% |
| U.S. stocks | 25% |
| International stocks | 25% |
| Bonds | 25% |
| Cash | 5% |
The level of detail should match your investment strategy. A simple portfolio may need only stocks and bonds. A more detailed allocation might separate Canadian, U.S. and international equities.
Avoid adding categories merely to make the portfolio appear sophisticated. Each target should serve a clear purpose.
Step 2: Calculate the current allocation
List the current market value of every investment included in the portfolio.
Then calculate:
Current asset weight = value of the asset class ÷ total portfolio value
If a portfolio is worth $100,000 and contains $78,000 in stocks, its current stock weight is:
$78,000 ÷ $100,000 = 78%
Use current market values rather than the amounts originally invested.
If your retirement investments are held across a TFSA, RRSP and non-registered account, you may need to combine them to understand the allocation of the complete retirement portfolio. A spreadsheet or the portfolio-analysis feature offered by some brokerages can make this easier.
Keep separate goals separate. Money reserved for an emergency fund or a near-term home purchase should not automatically be combined with a long-term retirement allocation.
Step 3: Compare the current allocation with the target
Calculate the difference between each current weight and its target.
| Asset class | Target | Current | Difference |
|---|---|---|---|
| Stocks | 70% | 78% | +8 percentage points |
| Bonds | 30% | 22% | −8 percentage points |
The table shows that stocks are overweight and bonds are underweight.
A difference does not automatically require a trade. Compare it with your chosen rebalancing threshold first.
Step 4: Use contributions and cash
The simplest way to rebalance is often to direct new money toward the underweight part of the portfolio.
This money may come from:
- regular contributions;
- a tax refund;
- accumulated dividends or interest;
- cash already sitting in the investment account;
- a lump-sum contribution.
Suppose the $100,000 portfolio above receives a new $4,000 contribution. Investing the entire amount in bonds changes the values to:
- stocks: $78,000;
- bonds: $26,000;
- total portfolio: $104,000.
Stocks now represent 75% and bonds represent 25%. The portfolio is closer to its 70/30 target without selling anything.
Using cash flows first may reduce trading costs and avoid realizing taxable gains in a non-registered account.
Step 5: Sell overweight investments if necessary
New contributions may not be large enough to correct significant drift, especially in a larger portfolio.
To restore the $104,000 portfolio precisely to 70% stocks and 30% bonds, the target values would be:
- stocks: $72,800;
- bonds: $31,200.
After investing the new contribution in bonds, you would still need to move approximately $5,200 from stocks to bonds to reach the exact target.
Exact precision is rarely necessary. Moving the portfolio comfortably back inside its permitted range may be sufficient.
Before selling, consider:
- trading commissions;
- bid-ask spreads;
- foreign-exchange costs;
- short-term redemption fees;
- tax consequences;
- whether a contribution or distribution will arrive soon.
Small deviations may not justify these costs.
Step 6: Choose where to place the trades
The portfolio may span multiple account types, and the account you use can affect the result.
TFSA and RRSP
Buying and selling investments within a TFSA or RRSP generally does not create a currently reportable capital gain or loss.
However, avoid withdrawing money merely to move it between your own TFSAs. A direct transfer completed by the financial institutions does not use contribution room, while withdrawing and recontributing the money yourself can create an excess contribution if you do not have enough available room.
The Canada Revenue Agency explains that a TFSA withdrawal is added back to your contribution room only in the following calendar year. Review the CRA’s TFSA withdrawal rules before moving money between accounts.
Non-registered accounts
Selling an investment in a non-registered account can result in a capital gain or capital loss.
You need accurate records of:
- the proceeds of disposition;
- the investment’s adjusted cost base;
- commissions and other selling expenses.
The amount shown as book value by a brokerage may not always equal the adjusted cost base required for tax reporting. The CRA’s capital-gains guide explains how gains, losses and adjusted cost base are calculated.
When possible, you may be able to use contributions or trades inside registered accounts to improve the total allocation while limiting taxable sales. Tax considerations should influence how you rebalance, but they should not be used to ignore a portfolio that has become materially riskier than intended.
Step 7: Record the decision
Write down:
- the date of the review;
- the target allocation;
- the current allocation;
- your permitted ranges;
- any trades completed;
- why you made or did not make a change;
- the next review date.
A short record prevents you from reinventing the strategy every time markets move. It also makes it easier to distinguish planned maintenance from emotional trading.
Should every account have the same allocation?
Not necessarily.
You can manage the allocation at two levels:
- Each account separately: Every TFSA, RRSP and non-registered account holds approximately the same asset mix.
- The combined portfolio: Different accounts hold different investments, but together they produce the intended allocation.
Managing each account separately is easier to understand. Managing the portfolio as a whole may provide more flexibility for taxes, contribution room and investment placement.
For example, your RRSP might hold most of your bonds while your TFSA holds more equities. The individual accounts look different, but the combined portfolio may still match the target.
The combined method requires good records. If it becomes difficult to monitor, the theoretical improvement may not be worth the additional complexity.
How all-in-one ETFs simplify rebalancing
An all-in-one asset-allocation ETF holds a diversified mix of underlying investments and generally rebalances that mix internally according to its mandate.
If your entire long-term portfolio consists of one suitable all-in-one ETF, you usually do not need to trade the underlying stock and bond funds yourself.
You still need to review whether:
- the ETF’s risk level continues to fit your goals;
- cash has accumulated outside the fund;
- you hold other investments that change the overall allocation;
- different financial goals require separate portfolios.
An all-in-one ETF reduces the mechanics of rebalancing, but it does not choose the appropriate risk level for you. Learn more in All-in-One ETFs in Canada.
Common portfolio-rebalancing mistakes
Rebalancing every time the market moves
Normal market fluctuations constantly change portfolio percentages. Reacting to every small movement creates unnecessary work and may increase costs and taxes.
Use a schedule, a threshold or both.
Changing the target to match recent performance
After stocks rise, a more aggressive portfolio may suddenly feel comfortable. After they fall, the same allocation can feel intolerable.
Changing the plan to follow recent returns defeats the purpose of rebalancing. Review the target when your circumstances change, rather than whenever market sentiment changes.
Selling before considering new contributions
New money, dividends and interest may correct some or all of the imbalance without a taxable sale, although income from savings accounts and non-registered accounts can be taxable.
Check available cash flows before placing trades.
Looking at only one account
A TFSA may appear too aggressive while an RRSP holds most of the bonds. Rebalancing the TFSA in isolation could leave the combined portfolio with too much fixed income.
Review all accounts serving the same goal.
Ignoring taxes and transaction costs
A mathematically perfect allocation can be financially inefficient if achieving it creates a large taxable gain or excessive trading expenses.
Rebalancing is a practical decision, not an exercise in producing perfect percentages.
Using rebalancing as market timing
Rebalancing may involve selling an asset that has performed well and buying one that has lagged, but that does not mean you know what will happen next.
The decision comes from the allocation rule—not a forecast.
A simple rebalancing rule you can use
A written rule might say:
I will review my portfolio every January and July. I will rebalance when a major asset class moves more than five percentage points from its target. I will use contributions, dividends and available cash first. If trades are still required, I will consider taxes and costs before selling.
Your percentages and review schedule may differ. What matters is deciding on the process before market movements test your emotions.
A good rebalancing rule should be:
- easy to understand;
- practical to calculate;
- inexpensive to follow;
- appropriate for your accounts;
- consistent with your goals and risk tolerance.
Does rebalancing improve investment returns?
Rebalancing does not guarantee higher returns.
Its main purpose is risk control. It prevents strong recent performance in one part of the portfolio from permanently changing the amount of risk you hold.
In some periods, an unrebalanced portfolio may earn more because the best-performing asset continues to rise. In other periods, rebalancing may help when leadership changes between asset classes. Neither result can be known in advance.
Judge the process by whether it maintains the portfolio you intended to own, rather than whether every trade immediately improves performance.
The goal is a portfolio you can maintain
Rebalancing should make your investment plan more consistent, not turn it into a constant optimization project.
Choose a target that reflects your goals. Allow reasonable room for market movement. Use contributions before sales, consider taxes and costs, and review the portfolio on a schedule you can sustain.
The best system is not the one that produces perfect percentages every day. It is the one that keeps your investments aligned with your plan while allowing you to remain invested.
That same principle supports simple investing and helps prevent the repeated strategy changes discussed in Why Time in the Market Beats Timing the Market.
This article is for general educational purposes only and does not constitute financial, investment, tax or legal advice. Investment decisions should reflect your objectives, time horizon, financial circumstances and tolerance for risk. Consider consulting an appropriately qualified professional when your portfolio or tax situation is complex.