How and When to Rebalance Your Portfolio

What rebalancing actually is

Rebalancing means selling a bit of what's grown into an oversized slice of your portfolio and buying more of what's shrunk, so you get back to your original target mix — say, 70% stocks and 30% bonds. It sounds backwards (selling winners, buying laggards), and that's exactly the point: it forces a disciplined version of "sell high, buy low" instead of letting emotion drive the decision.

Left alone, a portfolio that started at 70/30 stocks and bonds can drift to 80/20 or higher after a strong multi-year run in equities. That's not a bonus — it's a portfolio that's quietly taken on more risk than you signed up for. Rebalancing isn't about boosting returns; it's about keeping your risk level where you decided it should be.

When to rebalance: two approaches

There are two common triggers, and either one beats rebalancing based on gut feeling or headlines.

• Calendar-based: check your allocation on a fixed schedule, commonly once or twice a year (e.g., every January, or January and July). Simple, low-effort, and easy to stick to.
• Threshold-based: rebalance whenever an asset class drifts a set amount from its target, often described as a 5-percentage-point band (so a 70% equity target gets rebalanced once it hits roughly 75% or 65%). This reacts faster to big market moves but means checking in more often.

Many DIY Canadian investors use a hybrid: check once or twice a year, but only actually trade if you're outside your threshold band. This keeps trading costs and effort low while still controlling risk. What you should avoid is rebalancing every time the market has a bad week — that's reacting to noise, not managing a portfolio.

How to do it without triggering tax or fees

Where you hold the investment changes how rebalancing works in practice.

• Inside a TFSA, RRSP, or FHSA: sell and buy freely. These are registered accounts, so there's no capital gains tax on rebalancing trades inside them. This is the easiest place to rebalance.
• In a non-registered (taxable) account: selling a winner can trigger a capital gain, and the CRA taxes a portion of that gain as income. Before selling to rebalance in a taxable account, it's worth understanding the capital gains inclusion rules that apply to you — confirm the current details on the CRA website rather than guessing at a number.
• A tax-smart shortcut: instead of selling anything, use new contributions or dividend payouts to buy more of whatever's underweight. If you're adding money regularly anyway, directing it toward the lagging asset class can rebalance your portfolio gradually without triggering a single taxable sale.
• If you hold both registered and taxable accounts, do your selling inside the registered accounts first and use new money to adjust the taxable side. This keeps your overall household allocation on target while minimizing tax drag.

A simple example

Say you started with $10,000 split 70/30 between a broad equity fund and a bond fund — $7,000 and $3,000. After a strong year for stocks, that mix might grow to something like $8,400 in equities and $3,100 in bonds, roughly a 73/27 split on a larger total. To get back to 70/30, you'd trim some of the equity fund and add to the bond fund (or simply direct new contributions to bonds until the ratio evens out).

The dollar amounts here are illustrative only — always work from your own account statements, not a generic example, when you actually rebalance.

What to watch for

A few practical things trip people up.

• Trading costs and minimums: if your brokerage charges per trade, small rebalancing trades can eat into the benefit — this is another reason to lean on new contributions where possible.
• One-fund solutions: all-in-one asset allocation ETFs and target-date funds rebalance automatically inside the fund, so if you hold one of those, you generally don't need to do anything yourself.
• Life changes matter more than market moves: a new job, a mortgage, or getting closer to retirement is a better reason to change your target allocation than a single good or bad year in the market.

Frequently asked