Introduction
Building an investment portfolio is one thing. Keeping it pointed in the direction you originally intended is another. That’s where rebalancing comes in. I think rebalancing becomes more important as your portfolio grows because eventually your investments stop moving together. One stock takes off. Another goes nowhere. Technology gets hot. Canadian banks fall out of favour. Oil rallies. The TSX has a great year while another market struggles.
Before long, the portfolio you own might look quite different from the portfolio you thought you owned. That matters because your allocation determines how much risk you’re actually taking. I don’t think investors need to constantly tinker with their portfolios. In fact, I think excessive tinkering probably hurts more investors than it helps. But occasionally looking at your portfolio and asking, “Does this still represent how I want my money invested?” is something I think every serious investor should do.
The Biggest Misunderstanding
The biggest misunderstanding about rebalancing is that it means selling whatever has gone up. It doesn’t. If one of my best companies has performed extremely well, I’m not automatically going to sell it simply because its weighting increased. That would make little sense to me. Rebalancing is really about risk and portfolio construction, not punishing your winners. Imagine you originally wanted 10% of your portfolio invested in one company.
A few years later, that company has performed so well that it represents 30%. Maybe you’re perfectly comfortable with that. But you should at least recognize what happened. You no longer have the same portfolio. One company now has three times the influence it originally had over your results. That’s the part investors sometimes overlook.
How I Think About It
My own philosophy is pretty simple: I want to know why I own everything I own. I’m not interested in creating a mathematically perfect portfolio just for the sake of having neat percentages. If one of my highest-conviction investments becomes a larger position because the company keeps executing, I’m willing to let winners run. At the same time, there’s a point where conviction can quietly turn into concentration risk. That’s why I prefer to think of rebalancing as a portfolio checkup rather than a rigid calendar event.
I’m asking myself questions like:
- Has one position become large enough that a major decline would seriously damage my portfolio?
- Am I far more exposed to one sector than I realized?
- Has my investment thesis changed?
- Has my time horizon changed?
- Am I taking more risk than I was two years ago?
Those questions are more useful to me than simply saying, “It’s January, so I need to rebalance.”
Breaking It Down
Suppose you build a $100,000 portfolio like this:
- 50% Canadian equities
- 30% U.S. equities
- 10% international equities
- 10% fixed income
You might own Canadian banks, railways, utilities and energy companies alongside U.S. businesses and ETFs. Then the TSX has a particularly strong run. Your Canadian investments climb from $50,000 to $65,000 while the rest of the portfolio barely moves. Suddenly, Canada represents much more than 50% of your portfolio. There’s nothing inherently wrong with that.
The question is whether you want that additional exposure. If not, you could rebalance. There are two basic ways I’d consider doing it. The obvious approach is selling some of the overweight investment and buying whatever has become underweight. But there’s another method I generally like better when possible:
Use new money.
If I’m regularly contributing to my TFSA, RRSP or FHSA, I can direct new contributions toward the areas of my portfolio that have fallen below their desired weighting. That lets me rebalance without automatically selling investments I still like. Account type also matters. Inside a TFSA, investment income and withdrawals are generally tax-free, although a TFSA withdrawal doesn’t restore contribution room until the following calendar year.
RRSP withdrawals, on the other hand, are generally taxable, so I wouldn’t move money in and out of an RRSP casually just for portfolio housekeeping. The FHSA has its own tax advantages: eligible contributions are generally deductible, while qualifying withdrawals used to purchase a qualifying first home can be tax-free. And if you’re rebalancing a non-registered account, selling an investment can create a capital gain or capital loss that needs to be considered for tax purposes. That means the best rebalancing decision isn’t always simply, “Sell this and buy that.” Where the investment is held matters too.
Real Example
Let’s make this even simpler. You have a $50,000 TFSA.
Your original plan was:
Canadian stocks: $25,000
U.S. stocks: $20,000
Cash: $5,000
One of your Canadian holdings has a fantastic year, and your portfolio becomes:
Canadian stocks: $35,000
U.S. stocks: $20,000
Cash: $5,000
Your total portfolio is now worth $60,000. Canadian stocks have gone from 50% of the portfolio to about 58%. Would I immediately sell them? Probably not. First, I’d look at the underlying holdings. Maybe those companies still represent some of my best investment opportunities.
Instead, if I had another $5,000 or $10,000 to invest over the next several months, I might direct more of that money toward my U.S. positions rather than adding even more to Canada. The portfolio gradually moves back toward balance without unnecessary trading. That’s often how I prefer to think about it.
How I’d Apply It
If I were building a portfolio from scratch today, I wouldn’t obsess over exact percentages. I’d start by deciding what kind of portfolio I actually want. How much Canada? How much U.S. exposure? Individual stocks or ETFs? Growth versus dividends? How much volatility can I genuinely tolerate? Then I’d establish reasonable ranges.
For example, instead of telling myself Canadian equities must always equal exactly 40%, I might decide that somewhere between 35% and 45% is acceptable. That gives the portfolio room to move. I’d review those allocations a few times per year, but I wouldn’t automatically trade. If something became significantly overweight, I’d first consider directing new TFSA, RRSP or FHSA contributions toward the underweight portion. Only then would I consider selling.
Mistakes I’d Avoid
One mistake I’d avoid is rebalancing too frequently. Markets move constantly. Your portfolio percentages will never stay perfectly still. That’s normal. Another mistake is selling a great investment simply because it performed well. Sometimes a larger weighting is justified because the underlying business became more valuable. I’d also avoid ignoring taxes.
Selling investments inside a non-registered account can have completely different consequences than making changes inside a registered account. Finally, I wouldn’t use rebalancing as an excuse to constantly redesign my portfolio. There’s a difference between maintaining a strategy and repeatedly changing strategies.
Final Thoughts
Portfolio rebalancing doesn’t need to be complicated. At its core, it’s simply asking whether the portfolio you own today still matches the portfolio you intended to build. For me, that’s the important part. I don’t believe every investment needs to stay at some perfect percentage. Markets are messy, successful companies grow, and portfolios naturally evolve. But I do want to understand where my risk is coming from.
If one stock, sector or market becomes a much larger part of my wealth than I originally intended, I want that to be a conscious decision—not something I discover after the market turns against me. Rebalancing isn’t about constantly changing your portfolio. It’s about making sure you’re still the one deciding what your portfolio looks like.
