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.
Published 2026-07-21
A portfolio left to itself drifts: good years swell the equities, and the risk rises without a single decision being made. Rebalancing brings the portfolio back to target, and its difficulty is not technical but psychological: selling what has risen to buy what has fallen contradicts intuition every single time. The remedy is a written rule: a drift threshold that triggers action — five points, say — neither neglect nor compulsive tinkering. Execution follows the cheapest path: new contributions routed to the lagging categories first, with no sales and no tax; corrections by selling afterward, inside registered accounts where gains go untaxed, rather than in the taxable account. This article covers the threshold's choice, the cost-efficient execution mechanics and the logbook that turns an uncomfortable decision into a twice-yearly routine — which is exactly what it should be.
Set the target that makes drift measurable
Rebalancing presupposes a reference: the target allocation, written into the plan, sixty-forty or any other split derived from profile and horizon. Without a written target, drift does not exist, for want of a comparison point, and the portfolio evolves at the markets' whim with nobody deciding. The target is detailed by category — equities by region, bonds, cash — one number per box, and lives in the same document as the rule that will defend it. Its revision is a rare, motivated event — a change of horizon or circumstances — never a reaction to markets: revising the target because stocks are up amounts to removing the thermostat because the room is warm.
Choose the threshold that triggers action
Between the neglect that lets things drift and the zeal that adjusts endlessly, the written threshold draws the line: a five-point gap on a major category triggers rebalancing, below it nothing moves. That threshold filters the noise — ordinary fluctuations often correct themselves — and catches only the structural drifts, two good equity years turning a sixty-forty into a seventy-one-twenty-nine. The check happens on a fixed schedule, twice a year suffices, ten minutes of statement against the grid. The purely calendar alternative — rebalancing on a fixed date whatever the gap — works too: what matters is some mechanical rule, written before it is needed, that decides in place of the moment's mood.
Correct through the cheapest path
The return to target travels three paths, from cheapest to dearest. Contributions first: new deposits routed to the lagging categories correct without selling, without fees or tax — a method sufficient for accumulating portfolios with modest gaps. Sales inside registered accounts next: RRSP and TFSA allow selling the winners without tax consequence, at the price of a commission. Sales in the taxable account last: every crystallized gain there triggers tax, which demands weighing the corrected gap against the tax bill, a partial rebalancing sometimes being the right compromise. The hierarchy turns rebalancing into a minimal-cost operation, often a single commission per intervention.
Execute despite the discomfort, then log it
Rebalancing demands selling what has risen to buy what has fallen, a move intuition fights at every occurrence: the winners seem destined to continue, the losers to sink further. That discomfort cannot be eliminated; it is bypassed through mechanics, the rule deciding in your place, and understood through its function: rebalancing systematically sells high and buys low, a discipline instinct will never achieve alone. Each intervention gets logged — date, amounts, resulting allocation — in a journal documenting the system at work. That journal has a behavioural virtue: rereading three years of uncomfortable interventions and their results builds trust in the rule, and trust in the rule is what will hold it together at the next great test.
Quebec scenario: compare before confirming
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. The plan anticipated exactly this moment: a drift of more than five points on any category triggers action, no sooner and no later, guarding against both neglect and compulsive tinkering. He corrects through the cheapest path first: his monthly contributions flow into bonds for two quarters, with no selling at all. The residual gap is fixed with a single sale inside the RRSP, where the gain triggers no tax, rather than in his non-registered account where the same trade would have crystallized a taxable gain. Total cost of the operation: 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 single time; that discomfort is precisely why the rule was written down before it was needed.
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
Frequently asked questions
When should a portfolio be rebalanced?
When the drift from your target allocation exceeds the threshold written in your plan — five points, say — or on a fixed schedule if you prefer. The written rule guards against both excesses: the neglect that lets risk drift, and the compulsive tinkering that multiplies fees and taxes.
How do I rebalance at the lowest cost?
First route new contributions to the lagging categories: no sales, no tax. Fix the remainder with sales inside registered accounts, where gains are not taxed at sale, rather than in the taxable account. The typical bill amounts to one commission.
Why is selling what has risen so hard?
Because intuition promises the climb will continue. Rebalancing demands the opposite: sell high, buy low, mechanically. The numeric rule exists precisely to decide in intuition's place — and the discomfort you feel is the sign it is working.