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Updated 2mo ago.
Updated 2mo ago.
Rebalancing means returning your portfolio's asset allocation to its original target after markets have shifted it. For example, if your stocks rose significantly and now represent 90% instead of 80%, you sell some stocks and buy bonds to return to your 80/20 target.
On January 1st, your portfolio is 80% VEQT.TO / 20% ZAG.TO. After a strong market year, VEQT.TO now represents 87%. To rebalance, you buy more ZAG.TO (or direct new contributions toward ZAG.TO) to return to 80/20. In a TFSA or RRSP, rebalancing generates no tax.
Rebalancing forces you to sell what has risen (take profits) and buy what has fallen (buy at a discount). It's an anti-panic discipline that improves risk-adjusted returns over the long term. The ideal frequency is generally annual or when the allocation drifts more than 5% from target.