Market volatility can quickly shift the balance of your portfolio. A strong rally in equities may leave you overexposed to stocks, while a downturn can tilt your holdings too heavily toward fixed income. Rebalancing is the process of bringing your portfolio back to its intended structure, ensuring your investments continue to reflect your goals and risk tolerance.
Why Rebalancing Matters
Over time, market movements cause asset weights to drift away from their targets. Without rebalancing, a portfolio meant to be balanced can become riskier than intended. Rebalancing restores your original asset allocation, keeping risk exposure aligned with your investment profile. This discipline prevents short term swings from undermining your long term strategy.
When Should You Rebalance
Investors can rebalance based on time or thresholds. A calendar based approach means reviewing allocations quarterly or annually. Threshold based rebalancing occurs when one asset class drifts beyond a set range, such as five percent from its target weighting. Market volatility often accelerates these shifts, making it important to check allocations during sharp rallies or declines.
Strategies for Rebalancing
Calendar based: adjust holdings at set intervals regardless of market conditions.
Threshold based: make changes only when assets move beyond a defined range.
Cash flow rebalancing: use new contributions or withdrawals to restore balance without selling existing positions.
Choosing the right approach depends on your goals, risk tolerance, and tax considerations. This is where thoughtful risk management plays a key role in reducing unnecessary exposure.
How Often Should You Rebalance
Rebalancing too often can lead to unnecessary costs, while waiting too long can leave you exposed to risk. Many investors find that reviewing their portfolios once or twice a year is sufficient, while also checking after major market moves. The goal is to find a balance between discipline and practicality, without reacting emotionally to short term volatility.
The Impact on Risk and Returns
Rebalancing does not guarantee higher returns, but it does help manage risk. By bringing your portfolio back to its target weighting, you avoid being overly concentrated in a single asset class. This supports long term consistency, limits downside during market downturns, and keeps your strategy aligned with your financial goals. Over time, this discipline can make the difference between staying on track and falling behind.
Staying Disciplined in Volatile Markets
Volatility can tempt investors to abandon their strategy. Rebalancing provides a structured approach to decision making, ensuring changes are made with purpose rather than emotion. Investors should also consider tax efficiency when selling assets. A thoughtful tax planning strategy helps minimize costs when making adjustments.
Professional guidance adds another layer of discipline. For families building long term stability, rebalancing ensures their portfolios remain aligned with the path toward financial freedom.
Aligned Capital Partners Inc. (“ACPI”) is a full-service investment dealer and a member of the Canadian Investor Protection Fund (“CIPF”) and Canadian Investment Regulatory Organization (“CIRO”). Investment services are provided through Bilyk Financial Private Client, an approved trade name of ACPI. Only investment-related products and services are offered through Bilyk Financial Private Client and covered by the CIPF. Financial planning and insurance services are provided through Bilyk Financial Wealth Management. Bilyk Financial Wealth Management is an independent company separate and distinct from Bilyk Financial Private Client.