A friend of mine set up her portfolio in early 2020. She did the work. She read about asset allocation, picked a split she was comfortable with, and invested accordingly: 80% stocks, 20% bonds. Then she didn’t look at it for three years.

When she finally logged in during 2023, her portfolio was sitting at roughly 91% stocks and 9% bonds. She hadn’t changed a thing. The market did it for her. Stocks had grown so much faster than bonds that her careful 80/20 plan had quietly turned into something completely different.

She wasn’t upset. Her portfolio was up. But she also didn’t realize she was now carrying almost twice the risk she originally intended. If a serious downturn hit, her portfolio would fall much harder than the 80/20 version she thought she still had.

That’s portfolio drift. And rebalancing is how you fix it.

This isn’t financial advice. How and when you rebalance depends on your accounts, your tax situation, and what you’re comfortable with. But the concept is worth understanding.

What portfolio drift actually looks like

Let’s say you decide on a simple split: 80% stocks and 20% bonds. You invest $10,000. That means $8,000 goes into stocks and $2,000 goes into bonds.

A year passes. Stocks have a strong year and grow 15%. Bonds return 3%. Here’s where you end up:

Asset	Starting value	Growth	New value	New allocation
Stocks	$8,000	+15%	$9,200	approx. 82%
Bonds	$2,000	+3%	$2,060	approx. 18%
Total	$10,000		$11,260

After one decent year, you’ve already drifted from 80/20 to roughly 82/18. Not a big deal yet. But compound that over several years of strong stock performance and you can easily end up at 90/10 or even 95/5.

The numbers aren’t the problem on their own. The problem is that you chose 80/20 for a reason. Maybe that’s the level of risk that lets you sleep at night. Maybe it matches your timeline. Whatever the reason, drift slowly erases that decision without you noticing.

Why rebalancing matters

Rebalancing is just the act of bringing your portfolio back to your intended allocation. You sell some of what’s grown too large and buy more of what’s become underweight. Or, if you’re still adding money, you direct new contributions toward the smaller slice.

It feels strange at first. You’re selling the thing that’s winning and buying the thing that’s lagging. Every instinct tells you to do the opposite.

But rebalancing isn’t about chasing returns. It’s about controlling risk.

When stocks go on a long run, it’s tempting to let them ride. Why would you trim your winners? Because the flip side of higher stock exposure is a harder fall when markets correct. Someone who drifted to 95% stocks will feel a 30% market drop very differently than someone sitting at 80%.

Rebalancing is a risk management tool. It keeps your portfolio aligned with the level of volatility you originally said you could handle.

There’s a secondary benefit too. By periodically trimming the asset that’s grown and adding to the one that hasn’t, you’re systematically buying low and selling high. Not perfectly, and not every time. But over long periods, this mechanical discipline tends to work in your favour.

Three ways to rebalance

There’s no single right method. Each one works. The best approach is the one you’ll actually stick with.

1. Calendar rebalancing

Pick a date. Once a year, check your allocation and adjust if it’s drifted. Some people do it on their birthday. Some do it in January. The specific date doesn’t matter.

This is the simplest approach. You don’t have to monitor anything throughout the year. You just set a reminder, log in, and make adjustments if needed. If your allocation is still close to target, you do nothing and check again next year.

The downside is that it’s blind to what happens between check-ins. If there’s a massive market swing in March and you only rebalance in December, you might ride out months at an allocation you didn’t intend. In practice, this rarely causes serious harm. But it’s worth knowing the tradeoff.

2. Threshold rebalancing

Instead of picking a date, you pick a number. You rebalance whenever any asset class drifts more than a certain percentage from its target. A common threshold is 5%.

So if your target is 80% stocks and your stocks grow to 85% or drop to 75%, that triggers a rebalance. Otherwise, you leave it alone.

This method is more responsive to big market moves. If stocks surge or crash, you’ll catch it sooner. But it also requires you to check in more often, or set up alerts. And in volatile markets, you might end up rebalancing more frequently than necessary.

A practical middle ground: check quarterly and only rebalance if something has drifted more than 5%. That way you’re not watching daily but you’re also not waiting a full year if things move fast.

3. Contribution rebalancing

This one is my favourite for people who are still building their portfolios. Instead of selling anything, you just direct new money toward whatever is underweight.

Say your target is 80/20 and your current allocation has drifted to 85/15. Next time you invest, you put all of it into bonds until the ratio comes back closer to 80/20.

The big advantage here is that you never have to sell. That means no capital gains, no taxes triggered in non-registered accounts, and no trading fees. You’re rebalancing purely through new contributions.

The limitation is obvious: this only works if you’re regularly adding money, and if the drift isn’t so large that your contributions can’t catch up. For someone investing a few hundred dollars a month in a portfolio that’s drifted by tens of thousands, contribution rebalancing alone won’t be enough.

But for a lot of people in the accumulation phase, this is the cleanest, cheapest way to keep things in line.

The simplest approach: let the fund do it for you

If you hold a single all-in-one ETF like XEQT, VGRO, or XBAL, you don’t need to rebalance at all. The fund manager handles it internally.

These funds hold a fixed target allocation across multiple underlying ETFs. When one piece drifts, the fund rebalances itself. You don’t see it. You don’t pay extra for it. It just happens.

This is one of the biggest selling points of all-in-one ETFs, and it’s easy to overlook. You never have to decide when to rebalance, worry about thresholds, or resist the urge to let your winners ride. The fund enforces discipline for you.

If you want to understand more about how these funds work and why they’ve become so popular, the guide on XEQT and the case for simplicity goes deeper.

For multi-ETF portfolios: once or twice a year is plenty

If you’ve built your own portfolio with separate ETFs for Canadian stocks, US stocks, international stocks, and bonds, then rebalancing falls on you. But it doesn’t need to be complicated.

Once a year is fine for most people. Twice a year if you want to be more attentive. The research on optimal rebalancing frequency is surprisingly clear: there’s very little performance difference between monthly, quarterly, and annual rebalancing over long time horizons.

What does make a difference is doing it at all. A portfolio that’s never rebalanced will gradually shift toward whatever has performed best, which usually means more and more stocks. That’s fine when markets are going up. It’s less fine when they’re going down and you realize you’re far more exposed than you planned to be.

Watch out for taxes

In a registered account like a TFSA or RRSP, rebalancing has no tax consequences. You can sell and buy freely without triggering anything.

In a non-registered (taxable) account, it’s different. Selling an investment that’s gained value triggers a capital gain, and you’ll owe tax on it. This is where contribution rebalancing shines, because you’re not selling anything.

If you do need to sell in a taxable account, try to pair it with any losses you can harvest elsewhere. And think twice about rebalancing more than once a year in these accounts. Every extra sale is a potential tax event. The small improvement in allocation precision is rarely worth the tax cost.

Here’s a quick comparison of where each method works best:

Method	Best for	Tax impact	Effort
Calendar (annual)	Set-and-forget investors	Possible in taxable accounts	Low
Threshold (5%+)	Hands-on investors	Possible in taxable accounts	Medium
Contribution-based	People still adding money regularly	None	Low
All-in-one ETF	Everyone	None (handled internally)	None

The real risk isn’t rebalancing wrong. It’s never doing it.

Most people don’t lose money because they rebalanced on the wrong date or used a 4% threshold instead of 5%. They lose control of their risk because they never look at their allocation after the initial setup.

Drift is invisible. It doesn’t send you a notification. Your portfolio doesn’t look broken. The numbers go up, and everything seems fine. Until a correction hits and you realize your “balanced” portfolio was actually 93% stocks.

Pick a method. Any method. Put a reminder on your calendar. And once a year, spend ten minutes checking whether your portfolio still looks the way you intended it to.

If you want help tracking your allocation and spotting drift before it becomes a problem, that’s one of the things Greenline is built to help with.

Rebalancing: what it means and when to do it