Your Complete Guide to Index Investing with Dan Bortolotti

Why Rebalance Your Portfolio?

2018-06-17T20:44:39+00:00February 22nd, 2011|Categories: Asset Classes, Indexing Basics, Portfolio Management|Tags: , |73 Comments

An important part of the indexing strategy is that you occasionally rebalance your portfolio back to its target asset allocation. I get a lot of questions about rebalancing, so I felt it was time to put together a series of posts about the idea.

For those who are new to the concept, we’ll start with a primer on what rebalancing is. One of the most important decisions investors will ever make is their asset allocation—the percentage of stocks, bonds, cash and other asset classes in their portfolio. For example, a mix of 60% stocks and 40% bonds is common in a balanced portfolio.

The problem is that asset allocations don’t stay constant. As the markets move month by month, your portfolio’s stock-bond mix will change, sometimes dramatically. If you had a 60-40 portfolio in mid-2008, the stock portion fell to about 45% by March 2009. If you were at 60-40 when the market bottomed, then your mix would be close to 80% equities today.

That’s why investors should occasionally adjust their portfolio to get it back to its target. You can do this by adding new money to the underperforming asset classes, or by selling off some of the outperforming funds and using the proceeds to prop up the laggards. In either case, the idea is to “reset” your portfolio to its original asset allocation.

Why rebalance?

One of the benefits of rebalancing is that it encourages you to buy low and sell high, so many people assume that the strategy is designed to boost returns. But that’s not actually the case. Think about it like this: if stocks outperform bonds over the long term—and we wouldn’t invest in stocks if we didn’t expect this—then a portfolio that is never rebalanced will naturally become more and more heavily weighted to equities. So more often than not, rebalancing will mean trimming back stocks and moving that money to the fixed income side. Over the long term, that’s likely to lower returns, not increase them.

If we assume an annualized return of 10% for stocks and 5% for bonds, then a portfolio that starts out with 60% in equities will naturally drift to 80% stocks after 20 years. Most investors do not want their portfolios to get more risky as they age. Rebalancing, then, is primarily about managing risk by keeping your asset allocation more or less consistent. If it does boost returns, that’s simply a bonus.

Another benefit of systematic rebalancing is that it helps investors control their behaviour. Whenever you add money to your portfolio, you need to make a decision about where to allocate those new funds. If you’re like most investors who simply follow their emotions, you’ll likely add the money to whatever asset class is hot. (How many people are enthusiastically adding to the bond side of their portfolios these days?) However, this is simply performance chasing, and over the long term, it’s disastrous. A disciplined rebalancing schedule—preferably written down in an investment policy statement—helps you avoid this trap and stay on course.

So how frequently should you rebalance your portfolio? There is no simple answer, but in my next post, I’ll look at some of the options.


  1. Donna December 19, 2016 at 12:10 pm

    Hello. I recently asked Dan Solin (The Smartest Investment you’ll Ever Read) if there was a Canadian version of his US indexing strategies, and he kindly directed me to CCP-great site, and thanks to all for the info, as I am very new to DIY investing. I have about $70,000 to invest, with about 15 years before retirement.

    I’ve learned a lot reading the blogs, but there is so much info out there, and I’m not sure which steps to take or who to call first, to get the ball rolling.

    Can anyone offer a simple, uncomplicated strategy for investing this amount?

    Thanks so much!

  2. Canadian Couch Potato December 20, 2016 at 11:06 am

    @Donna: Welcome to the blog. I’d suggest you look at my model portfolios and choose one of the first two options (Tangerine or e-Series):

  3. Jose January 13, 2017 at 1:07 pm

    Hi, just want to say thanks for this great blog and strategy. I’ve started using it as of last year (I’m a bit late but have a good chunk of money saved up) but I did have a question about the mix. In some online places, they mention that your stocks to bonds mix should be somewhere in the mix of bonds = your age and stocks = the difference. Is that still the case if you’re in your mid 40s?

  4. Canadian Couch Potato January 13, 2017 at 1:20 pm

    @Jose: The “your age = bonds” rule of thumb is a fine place to start the discussion, but it’s not very helpful in the final decision. This post may help:

  5. sean shaw January 15, 2017 at 11:26 pm

    Re-balancing schedule: Could you advise me as to the month of the year when re-balancing is most productive? I have been advised to re-balance my portfolio either on 1st. January or on 1st. July. Depending on the ups and downs in the market, would you suggest either of the above two dates or would any date would be o.k. provided I keep to this date every year for re-balancing?


  6. Canadian Couch Potato January 16, 2017 at 11:45 am

    @Sean: Your rebalancing schedule doesn’t need to be so strict. In a taxable account there might be some benefit to rebalancing (or not) on certain dates, but in an RRSP or TFSA it doesn’t matter, and it does not need to be the same date every year.

  7. Sherman January 23, 2017 at 2:10 am

    Hi when I’m interesting in following Option 2 – When I make monthly contributions to my account, does that mean each time, I buy more of each fund? Ex. TD E-Series Fund 1,2,3,4?
    So if I have 25$ to put in monthly, do I divide it up to ensure that afterwards, each fund has the same balance as well?

  8. Canadian Couch Potato January 23, 2017 at 8:58 am

    @Sherman: If you want to keep the portfolio in balance, you would add more money to asset classes that are below their target. But if the portfolio is relatively small you don’t have to worry about veering off target too much.

  9. Sherman January 24, 2017 at 12:14 am

    Thanks for your reply. I’m not sure if I really understand what you mean. So every month, if I make a contribution of 1000$. I would add money to each fund in a way that keeps it in balance right?

    Or would I just equally divide that 1000$ into each asset class?

  10. Canadian Couch Potato January 24, 2017 at 7:24 am

    @Sherman: It makes much more sense to add enough to each asset class to keep the portfolio in balance.

  11. Matty January 28, 2017 at 1:14 pm

    I’m torn between buying VUN or VFN stocks via TD DI or Tangerine Index funds. You seem to favour Tangerine. I have 10k and want to invest it and am about to pull the trigger. Advice?

  12. Canadian Couch Potato January 28, 2017 at 2:08 pm

    @Matty: It’s very difficult to cost-efficiently build an ETF portfolio with $10K. This article should help:

  13. Charles Messier March 5, 2017 at 3:52 pm

    Hi Dan ! In The MoneySense Guide, you say at page 288 that rebalancing with cashflow is “impractical to do this monthly if you use ETFs, as your transaction costs will be very high and they’ll overwhelm the benefits”. I’m wondering why because with Questrade, for example, buying ETFs is free. Is it because it wasn’t free in 2013 when you wrote the book ?

  14. Canadian Couch Potato March 5, 2017 at 4:37 pm

    @Charles: Only a small number of investors use Questrade so I can’t assume that everyone can trade ETFs for free. But if you pay no commissions, then sure, you can add new money monthly.

  15. Rahul Soni April 28, 2017 at 12:10 am

    Hi Dan, after using most of my savings towards downpayment for a house I am planning to start investing to build a retirement portfolio (30+ years to retirement). I have previously invested in mutual funds only and I was paying 85-120 bps in MERs and its time for me to switch to ETFs.

    I am planning to invest $2000 every month but stick to ETF portfolio with one ETF trade every month that costs $10 (which I think is still better than paying an extra 50 bps in management fee to Wealthsimple every year). With a 25% VCN, 25% ZAG and 50% XAW over 4 months, I will keep contributing in the same pattern every 4 months. I am also planning to re-balance every year.

    I noticed your model ETF portfolio is for investors with over $50,000 in portfolio size and for investors who invest in bulk (vs monthly).What is the reason for such minimum portfolio size? If it is driven by transaction fees, based on my planned trades, ETFs are still cheaper than other options. Can you please comment / advise? Thank you.

  16. Canadian Couch Potato April 28, 2017 at 8:10 am

    @Rahul: The $50K guideline is just an estimate and will vary depending on the circumstances. The main idea is that the $10 trading commissions can easily outweigh the lower MER of ETFs compared with an option like the e-Series funds. If you are starting from scratch and investing $2,000 per month for 12 months you will pay $120 to invest $24,000. It would be cheaper (and easier) to use e-Series funds and set up automatic monthly contributions to each fund ($500 to each asset class).

    This blog is old but introduces the important ideas:

  17. sue crispin April 30, 2017 at 10:53 am

    Hi Dan,
    I had a rebalancing question. If using your current Model porfolio:

    If I have a situation where I have an RSP, I have a spousal RSP and my husband has an RSP, how does this Model portfolio rebalancing work. I will not be putting in RSP contributions as I am putting my money in a CCPC on a regular basis (tax efficient, balanced approach). My husband is the one putting in RSP contributions monthly. I started the spousal years ago because of the imbalance with where his RSP was at and where my was at.
    I don’t know how to go about keeping the rebalance in mind across these 3 accounts in the case I illustrated where one account will be having new money in it and 2 will not.
    Does one look to sell something in the 2 accounts if necessary to arrive at that balance? I don’t think I could rely on just the idea of using new money to top up the account that is receiving the money and buy the underperforming funds?
    It is hard to look at a portfolio to rebalance it across 3 accounts and am not sure if it makes sense to put the assets in each account separately i.e. Canada/Bonds in one RSP and the spousal and international/US (using XAW) in the other?
    looking at a 40/60 fixed income/equity mix overall
    any thoughts would be appreciated. thank you

    I have seen the rebalance spread sheet and its intimidating because of the 3 accounts I have and I don’t know how to approach this

  18. Canadian Couch Potato April 30, 2017 at 10:06 pm

    @Sue: I have found that managing multiple accounts is one of the most difficult tasks for DIY investors to manage. This is usually the point where it can make sense to get professional help, especially if some of the accounts are taxable.

    While it is not ideal, you could do worse than simply holding the same target asset allocation in all of the accounts. You might give something in tax-efficiency but it’s better than analysis paralysis. (Just use something like ZDB for the bonds in the corporate or personal non-registered accounts.) You would would have to occasionally sell overweight assets if you are not adding new money to each account.

  19. Tony June 12, 2017 at 4:59 pm

    Hi, brand new to TD E-Series. Is there a step by step tutorial about setting up a tfsa to reflect ccp?

  20. Joe October 31, 2017 at 2:34 pm

    l am looking to get into the couch potato style of investing. Can you tell me which ETF’s are best suited for an RRSP, TFSA and a non registered account. From what l have been reading, US listed ETF’s are better suited in an RRSP for tax reasons because of the withholding taxes.

  21. Canadian Couch Potato November 1, 2017 at 12:40 pm

    @Joe: My colleague, Justin Bender, has created model portfolios specific to account types:

    It is true that US-listed ETFs are more tax-efficient in RRSPs, but you do need to be careful to avoid excessive currency conversion costs:

  22. Kyle J January 30, 2018 at 1:10 pm

    What do you think of ETF bonds like ZFM & ZHY?

  23. Laura April 27, 2018 at 11:58 am

    Hi there. I have about 60 000 to invest and I am 30 years old and don’t want to touch it till retirement with no plans on using the money. My risk tolerance is also high. I wanted to put it all in a TSFA and leave it for retirement while contributing lumps occasionally for rebalancing. I also wanted to make smaller monthly contributions of 300-500 a month to a RRSP. What is the best course of action for me out of the three (tangerine, TD or ETF) or a mix? I want to make the highest amount of return on my TSFA since earnings are tax free I’m able to take the risk for that.
    So would high risk ETFs be better for the TSFA while once of the other two would be better for the RRSP?

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