Rebalancing: Bring a Portfolio Back to Its Target
Record the target allocation in the plan and define the drift that triggers rebalancing before the market decides for you.
In this article
A portfolio left to itself drifts. Good years swell the share of equities, and the risk rises without any decision being made. Rebalancing brings the portfolio back to target. Its difficulty is psychological rather than technical, since selling what has risen to buy what has fallen contradicts intuition every time. The remedy is a written rule: a drift threshold that triggers action, five points for example. That way you avoid both neglect and compulsive tinkering. Execution follows the cheapest path. You route new contributions to the lagging categories first, with no sales and no tax. You then correct by selling inside registered accounts, where gains go untaxed, rather than in the taxable account. This article covers the choice of threshold, low-cost execution and the logbook that turns an uncomfortable decision into a twice-yearly routine.
Set the target that makes drift measurable
Rebalancing needs a reference: the target allocation, written into the plan. It might be 60-40 or another split drawn from your profile and horizon. Without a written target there is no drift, for lack of a comparison point, and the portfolio follows the markets with nobody deciding. Detail the target by category (equities by region, bonds, cash) with one number per box, and keep it in the same document as the rule that defends it. You revise the target only for a specific reason, such as a change of horizon or circumstances, never in reaction to markets. Revising the target because stocks are up is like removing the thermostat because the room is warm.
Choose the threshold that triggers action
The written threshold draws the line between neglect, which lets things drift, and zeal, which adjusts endlessly. A five-point gap on a major category triggers rebalancing. Below that, nothing moves. The threshold filters out noise, since ordinary fluctuations often correct themselves, and keeps only the deeper drifts. Two good equity years are enough to turn a 60-40 into a 71-29. Check on a fixed schedule. Twice a year is enough: ten minutes to compare your statement with your grid. The purely calendar alternative, rebalancing on a fixed date whatever the gap, works too. What matters is a mechanical rule, written before you need it, that decides in place of the mood of the moment.
Correct through the cheapest path
There are three paths back to target, from cheapest to dearest. First, contributions: you route new deposits to the lagging categories. You correct without selling, without fees or tax, which is enough for a portfolio in its accumulation phase with modest gaps. Second, sales inside registered accounts: the RRSP and TFSA let you sell winners with no tax consequence, at the price of a commission. Third, sales in the taxable account: every gain realized there triggers tax. You then have to weigh the corrected gap against the tax bill, and a partial rebalancing is sometimes the right compromise. This order brings the cost of rebalancing down to a minimum, often a single commission per intervention.
Execute despite the discomfort, then log it
Rebalancing means selling what has risen to buy what has fallen. Intuition fights that every time: the winners seem destined to continue and the losers to sink further. That discomfort does not go away. You get around it through mechanics, by letting the rule decide for you, and you understand it through its function: rebalancing systematically sells high and buys low, a discipline instinct never achieves alone. Log each intervention (date, amounts, resulting allocation) in a journal that shows the system at work. The journal also helps with behaviour. Rereading three years of uncomfortable interventions and their results builds trust in the rule, and that trust is what will hold it together at the next great test.
Quebec scenario
A pharmacist in Alma has a written plan calling for 60% stocks and 40% bonds. After two strong market years, his statement reads 71-29. His portfolio has become riskier without a single decision on his part. His plan anticipated this moment: a drift of more than five points on any category triggers action, no sooner and no later. That guards against both neglect and compulsive tinkering. He corrects through the cheapest path first: his monthly contributions go into bonds for two quarters, with no selling at all. He fixes the remaining gap with a single sale inside his RRSP, where the gain triggers no tax. In his non-registered account, the same trade would have crystallized a taxable gain. The operation costs him one $9.95 commission. He logs the date, the amounts and the new allocation in his investment journal, then schedules the next check in six months. Selling what has risen to buy what has fallen still feels wrong every time. That is exactly why the rule was written down in advance.
Checklist
- Record the target allocation in the plan
- Choose the drift threshold that triggers action
- Check the drift on a fixed schedule
- Route contributions to the lagging categories
- Sell inside registered accounts first
- Avoid unnecessary taxable sales
- Execute despite the discomfort of selling winners
- Log the date, amounts and new allocation
- Schedule the next check
The questions we get
A question about your situation?
A Quebec broker answers, with no commitment.
Read next
// Investments
Risk Profile: Connect Possible Losses to the Time Horizon
Connect the temporary loss you can tolerate to the actual withdrawal date before setting a risk profile.
// Investments
Invest a Lump Sum or Invest Gradually
Weigh your tolerance for an immediate decline against the cost of staying in cash before investing at once or gradually.
// Investments
TFSA or RRSP: Choose by Goal and Tax Rate
Choose between TFSA and RRSP based on the goal, the withdrawal horizon and your current and future tax rates.