How and When to Rebalance Your Investment Portfolio in Ontario

Markets move. Equities surge ahead of bonds for several years, then give back gains in a correction. International stocks lag domestic for a decade and then outperform. Over time, these movements cause your portfolio to drift significantly from its original target allocation. Rebalancing is the practice of periodically resetting your portfolio back to its intended mix. Done thoughtfully, it is one of the most valuable — and least exciting — disciplines in long-term investing.

Why Your Portfolio Drifts and Why That Matters

Suppose you start with a target allocation of 60% equities and 40% fixed income. After a strong bull market run, your equities have grown to represent 75% of your portfolio. That sounds good on the surface — your investments went up. But now you are carrying meaningfully more risk than you originally intended.

If a correction follows, a 25% drop in equities hits much harder at a 75% equity weight than at 60%. You are no longer invested according to your risk tolerance and financial plan — you are invested according to wherever the market happened to take you. Rebalancing corrects this drift and reinstates the level of risk you deliberately chose.

Beyond risk management, rebalancing also enforces a buy-low, sell-high discipline in a systematic way. When you rebalance, you are trimming the assets that have grown (selling some high) and adding to those that have lagged (buying low). Over a long enough time horizon, this mechanical discipline can improve risk-adjusted returns relative to a portfolio left to drift.

Common Rebalancing Approaches

There is no single correct rebalancing method. Most investors choose from one of three approaches, or a combination:

Calendar-based rebalancing. You rebalance on a set schedule — annually, semi-annually, or quarterly — regardless of how much the portfolio has drifted. This is simple and easy to execute, but it can mean rebalancing when drift is minimal (wasteful) or missing a large drift in between review dates.

Threshold-based rebalancing. You monitor the portfolio continuously and only rebalance when an asset class drifts beyond a set tolerance — say, 5 percentage points from target. This is more responsive to actual market conditions but requires more active monitoring.

Combined approach. Review on a regular calendar schedule, but only rebalance if drift exceeds a meaningful threshold. For most investors working with a financial planner, this is the most practical method — it avoids unnecessary trading while ensuring drift does not go unchecked for long periods.

Tax Considerations for Ontario Investors

This is where rebalancing becomes significantly more nuanced for Ontario investors, particularly those holding assets in non-registered accounts.

In a registered account — RRSP, RRIF, or TFSA — rebalancing has no immediate tax consequences. You can sell and buy freely within these accounts without triggering a taxable event. This makes registered accounts the preferred home for rebalancing activity where possible.

In a non-registered account, selling an asset that has increased in value triggers a capital gain, 50% of which is included in your taxable income at your marginal rate. If your equities have grown significantly over a decade, selling them to rebalance can generate a substantial tax bill.

Strategies to rebalance tax-efficiently in non-registered accounts include:

Redirect new contributions. Rather than selling overweight assets, direct new cash — including reinvested dividends — into underweight asset classes. This rebalances over time without triggering dispositions.

Use asset location to your advantage. Ideally, assets with higher expected turnover (or those more likely to trigger rebalancing) are held inside registered accounts, while tax-efficient holdings (like broad equity index funds or Canadian dividend stocks) sit in non-registered accounts.

Harvest losses strategically. If some positions have unrealized losses, these can be realized and used to offset capital gains triggered by rebalancing other positions. This is called tax-loss harvesting and requires careful attention to the superficial loss rules under the Income Tax Act.

Rebalance through withdrawals. Retirees taking regular withdrawals from non-registered accounts can direct those withdrawals from overweight positions, effectively rebalancing without additional purchases.

How Often Should Ontario Investors Rebalance?

For most investors, rebalancing once per year is sufficient. Research suggests that rebalancing more frequently than annually tends not to meaningfully improve outcomes and adds transaction costs and potential tax friction. Less than annually risks allowing significant drift to accumulate.

The exception is during periods of extreme market volatility — a sudden 30% equity sell-off may warrant an earlier rebalancing review, as the portfolio's risk profile has shifted dramatically in a short time.

During the 2020 COVID crash, investors who rebalanced into equities in March of that year captured a remarkable recovery. The discipline to buy into a falling market is psychologically difficult, which is precisely why having a pre-set rebalancing policy — rather than making ad-hoc emotional decisions — tends to produce better long-run outcomes.

Rebalancing as Part of a Broader Investment Plan

Rebalancing is not an isolated activity. It should be embedded in a broader investment plan that defines your target allocation, establishes tolerance bands, accounts for the tax treatment of each account type, and aligns with your income needs and time horizon.

At Pineault Wealth Management in London, Ontario, Marc Pineault works with clients to build and maintain investment plans where rebalancing is systematic, tax-aware, and always connected to the bigger financial picture — not just a mechanical exercise, but a disciplined process that serves your long-term goals.

If your portfolio has not been reviewed for drift in the past year, now is a good time to take a look.

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This article is for educational purposes only and does not constitute personalized financial advice. Please consult a qualified financial planner before making any financial decisions.