Rebalancing is when you adjust your investments back to the mix you originally wanted.
Over time, some investments may grow faster than others. That can slowly change the balance of your portfolio.
For example, you might start with a simple mix of stocks, ETFs, or different types of investments. But after a while, one part may become much larger than planned because it performed well.
Rebalancing helps bring things back in line.
It is a way of checking whether your portfolio still matches your goals, risk level, and long-term plan.
Why Rebalancing Matters
Investments do not all move the same way.
Some may rise quickly. Others may grow more slowly. Some may fall for a while.
Because of this, your portfolio can drift away from where you started.
That matters because your investment mix affects how much risk you are taking.
If one investment becomes too large, your portfolio may depend too much on that one area. Even if that investment has done well, it can still increase your risk.
Rebalancing helps stop one part of your portfolio from quietly taking over.
A Simple Way to Think About It
Imagine your portfolio is supposed to be balanced.
If one side grows too much, the whole thing can become uneven.
Rebalancing is like putting things back where they are supposed to be.
You are not trying to predict the future. You are simply keeping your investment plan from drifting too far away from what you intended.
How Rebalancing Works
Rebalancing can happen in a few different ways.
You might sell a small amount of something that has grown a lot and move that money into something that has become smaller.
Or, instead of selling, you might use new contributions to buy more of the investments that are underweight.
For beginners, using new contributions can feel simpler because you are adding money rather than selling anything.
The main idea is to bring your portfolio closer to your target mix.
Rebalancing Can Help Control Emotions
Rebalancing can also help reduce emotional investing.
When one investment is doing really well, it can be tempting to keep adding more and more to it. When something is falling, it can be tempting to avoid it completely.
Rebalancing gives you a calmer process.
Instead of chasing what has recently gone up, you are following a plan.
That does not mean rebalancing is perfect, and it does not guarantee better returns. But it can help keep your decisions more consistent.
How Often Should You Rebalance?
You do not need to check your portfolio every day.
Some people rebalance once or twice a year. Others rebalance when their portfolio gets too far away from their target mix.
For many beginners, the important thing is not the exact schedule. It is simply remembering to review your portfolio from time to time.
If you use an all-in-one ETF or a robo-advisor, some of this may already be handled for you.
Fresh Tip
Before rebalancing, make sure you know what your target investment mix actually is.
It is hard to rebalance if you do not know what you are trying to return to. Even a simple plan can help, such as deciding how much of your portfolio you want in broad-market ETFs, Canadian investments, cash, or other holdings.
Learn More
- What Is an ETF?
- Diversification, Diversification, Diversification
- What Is Dollar-Cost Averaging?
- What Is a TFSA?
- Why Your First Financial Goal Should Be Boring
Bottom Line
Rebalancing is the process of adjusting your investments back to your intended mix.
It helps keep your portfolio aligned with your goals and risk level.
You do not need to make it complicated. The basic idea is simple: check your portfolio occasionally, notice if it has drifted, and bring it back toward the plan.