The Importance of Rebalancing Your Portfolio: A Guide for Canadian Investors

Investing isn’t a “set it and forget it” thing. Over time, even a well-diversified portfolio can drift off course. This is where rebalancing comes into play. A crucial but often overlooked practice, rebalancing your investment portfolio helps keep your investments aligned with your goals, risk tolerance, and time horizon.

What Is Rebalancing?

Rebalancing is the process of restoring your portfolio to your desired asset allocation and ensuring it matches your tolerance for risk and your financial goals.¹

Let’s look at why rebalancing your portfolio matters and how often you should consider it for your portfolio.

Markets Move and Your Risk Changes

If you don’t rebalance, you could be letting winners ride and increasing your risk exposure. A portfolio that was once moderate can quietly become aggressive, which might feel great in a bull market but can sting in a downturn. Rebalancing thus keeps your risk where you intend it to be.

Currency Exposure Necessitates Management

If you hold U.S. or international assets, currency fluctuations can distort your portfolio over time. Still, rebalancing can help manage these FX risks by resetting allocations without trying to “time” the loonie.

Rebalancing Encourages Buying Low and Selling High

It sounds simple, but few investors consistently follow this mindset. Rebalancing encourages you to decrease positions in potentially overvalued assets and increase those in undervalued ones, which in practice may mean selling what’s popular and buying what’s not.

It Can Be Tax-Efficient

For non-registered accounts, rebalancing can trigger capital gains,² but with smart strategies, like using new contributions, dividends, or losses to offset gains, you can rebalance with a minimal tax impact. Generally, interest, dividends, or capital gains earned on investments in a TFSA are not taxable, regardless of whether money is held in the account or withdrawn.³

How Often Should You Rebalance?

There’s no one-size-fits-all answer, but here are a few practical options:

• Once or twice annually, especially if you already have a meeting on the calendar with your financial advisor.
• When an asset class deviates by a set percentage (e.g., 5 percent) from its target.
• A hybrid of both approaches would involve reviewing quarterly and acting if the deviation exceeds your threshold.

Rebalancing your portfolio is one of the few investing moves where doing less—and doing it on purpose—leads to better long-term outcomes. For Canadian investors facing a concentrated market, currency shifts, and global volatility, the case for rebalancing is even stronger.

Make rebalancing a habit and meet with your financial advisor today to ensure your portfolio still reflects your goals as an investor.

1. https://www.investopedia.com/terms/r/rebalancing.asp
2. https://www.manulifeim.com/retail/ca/en/viewpoints/tax-planning/portfolio-reviews-capital-gains-considerations
3. https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/tax-payable-on-tfsas.html
   
   

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.