Guest blog from the Alberta Securities Commission’s CheckFirst.ca.
This past year was a standout for financial markets. Stock markets surged, retail trading boomed, and optimism seemed to be the guiding force.
In that kind of environment, it’s easy to make decisions based on emotion. It’s easy to get swept up in the excitement of a bull market run and lose sight of your long-term investment strategy. Achieving your financial goals requires understanding yourself as an investor: knowing your risk tolerance, ensuring your portfolio remains balanced and aligned with your time horizon, and getting the advice you need to make it happen.
Knowing the basics of how a balanced portfolio works, why portfolios drift, and what the rebalancing process looks like is essential to keeping you on track towards reaching your goals.
What is portfolio rebalancing?
A balanced portfolio involves allocating investments across various asset classes–such as stocks, bonds, and cash–in ratios that align with your risk tolerance, time horizon, and investment strategy. For example, younger investors typically want to grow their portfolio during their working years so they may prioritize stocks because of their growth potential. Investors who are nearing or living in retirement often favour fixed-income investments like bonds to reduce risk and preserve the earnings accumulated from investing.
Over time, market fluctuations, sector performance, global events, and trends can cause this asset allocation to drift away from the target asset mix and risk level that you started with. This phenomenon is called portfolio drift.
Rebalancing your portfolio addresses this drift by restoring your original asset allocation. This process involves buying or selling assets to bring your investments back to their target balance. Think of rebalancing as a routine check-up for your investments–similar to steering a car back on course after a slight deviation. By sitting down with your investment advisor to review and adjust your investments periodically, you can ensure your portfolio stays on track with your risk tolerance and goals as you continue on your investing journey.
Why does portfolio drift happen?
There are several factors that contribute to portfolio drift:
Market performance: As of 2024, the TSX has grown by 21.54 per cent. For Canadians with TSX-focused investment funds or stocks in their portfolios, this surge might mean that the overall value of stocks in their holdings has risen significantly. A portfolio favouring these TSX stocks could yield higher returns, but exposes you to greater market volatility. Remember, a deviation from your original asset mix and risk level could leave you vulnerable to a sudden drop in stock prices.
Seasonal trends: Short-term events can also change your portfolio’s balance. For example, the Santa Claus Rally, where stock prices often rise during the final week of December, or the January Effect, where stocks–especially small-cap equities–tend to perform well at the start of the year, could also impact your asset allocation.
Political and economic events: Political or economic changes can have a big impact on the markets and, in turn, on your portfolio. For example, the outcome of the 2024 U.S. election has caused the U.S. stock markets to surge and interest in alternative investments like crypto to increase significantly. While these changes may offer growth opportunities, they also introduce risks tied to global trade, increased speculative trading, regulatory changes, and market uncertainty.
Why should you rebalance your investment portfolio?
By routinely rebalancing, you ensure your portfolio is well-diversified, which is a cornerstone of sound investing. For those implementing a specific investment strategy, rebalancing can help maintain your strategy.
Monitoring your portfolio becomes especially important during significant market swings. According to Vanguard’s 2020 study entitled “The Value of Advice: Addressing the Role of Emotions,” investors with clear financial goals were more likely to stick to their strategies during turbulent times instead of letting emotion drive their decision making. The research showed that following a plan reinforced long-term thinking and helped investors avoid chasing short-term gains out of FOMO (fear of missing out).
How and when should you rebalance your portfolio?
Deciding when to rebalance is just as important as the process itself. Studies show that a planned approach to monitoring investments reduces the risk of overconcentration in a single asset or sector. Here are three common approaches:
Calendar rebalancing: This approach involves reviewing your portfolio allocation at regular intervals (i.e. quarterly, semi-annually, or annually). However, one critical aspect to remember is that rebalancing too frequently or too infrequently can be inefficient. Rebalancing too often may result in higher transaction costs and larger tax implications, especially in taxable investment accounts. On the other hand, rebalancing too infrequently can cause your portfolio to drift too far from the target allocation over time.
Threshold-based rebalancing: This method is commonly used by asset managers. It allows your portfolio allocation to drift within a tolerance threshold. Rebalancing will only occur when the value in your portfolio exceeds this range. For example, if you want equities to make up 60 per cent of your portfolio, the threshold-based approach would require rebalancing if the equity allocation exceeds 65 per cent or falls below 55 per cent. This method requires frequent monitoring, so it works best when you are partnered with an investment team.
Hybrid rebalancing: Hybrid combines the calendar-based and the threshold-based approaches. Asset allocation weights are checked at regular intervals, but changes are only made if your investments have drifted beyond your target percentages by a certain amount.
Successful investing isn’t about perfect timing or chasing market trends. It is about getting the advice you need to make informed, disciplined decisions that align with your financial objectives. Your portfolio is more than just numbers–it’s a reflection of your vision for retirement. By regularly sitting down with your investment advisor to discuss your investments and to rebalance when necessary, you can ensure that you’re setting yourself up to make that vision a reality.
Learn more about structuring your portfolio for success at our upcoming seminar. You can register by clicking here.

David Popowich and Faisal Karmali are Investment Advisors with CIBC Wood Gundy in Calgary. The views of David Popowich, Faisal Karmali, and guest author do not necessarily reflect those of CIBC World Markets Inc. This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. The commentary is for informational purposes only and is not being provided in the context of an offering of any security, sector, or financial instrument, and is not a recommendation or solicitation to buy, hold or sell any security. CIBC Private Wealth consists of services provided by CIBC and certain of its subsidiaries, including CIBC Wood Gundy, a division of CIBC World Markets Inc. The CIBC logo and “CIBC Private Wealth” are trademarks of CIBC, used under license. “Wood Gundy” is a registered trademark of CIBC World Markets Inc.
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