Portfolio Rebalancing: When and How to Do It

Portfolio rebalancing is the process of realigning the weights of your portfolio's assets to maintain your target allocation. Over time, some holdings outperform others, causing your portfolio to drift from its intended allocation. Rebalancing brings it back in line.

Why Rebalancing Matters

Without rebalancing, a portfolio that started as 60% stocks and 40% bonds might drift to 75% stocks and 25% bonds after a bull market. This means you are taking on more risk than originally intended. Rebalancing enforces discipline by selling some of what has gone up and buying some of what has gone down — a systematic way to buy low and sell high.

Common Rebalancing Strategies

Calendar-Based Rebalancing

Rebalance on a fixed schedule — quarterly, semi-annually, or annually. This is simple to implement and avoids emotional decision-making. Annual rebalancing in January is a common approach.

Threshold-Based Rebalancing

Rebalance when any asset class drifts beyond a set threshold (e.g., 5% from target). This is more responsive to market movements but requires regular monitoring. A portfolio tracker can alert you when drift exceeds your threshold.

Cash Flow Rebalancing

Direct new contributions toward underweight asset classes instead of selling overweight ones. This avoids triggering capital gains in taxable accounts and can be the most tax-efficient approach.

Tax Implications of Rebalancing

In taxable accounts, selling to rebalance triggers capital gains or losses. Consider rebalancing primarily within tax-advantaged accounts (RRSP, TFSA, IRA, 401k) where there are no immediate tax consequences. In taxable accounts, cash flow rebalancing or tax-loss harvesting can help offset the tax impact.

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