Understand rebalancing portfolios

In this article:

Overview

Rebalancing is the process of moving funds between your investments to maintain your portfolio's desired asset allocation. It involves selling some assets and using those funds to buy others to bring your portfolio back to its original plan.

You'll need to rebalance your portfolio when your asset percentages shift from your initial plan.

Common reasons for rebalancing include:

  • Price changes in your investments
  • Deposits or withdrawals
  • Changes in your investment goals
Example: Sam wants 35% of their money in non-Canadian stocks and 65% in ultra-conservative bonds as a 10-year investment strategy. Over the past month, the price of their stocks went down. They now have 20% of their money in stocks and 80% in bonds, which is more in bonds than they wanted. To rebalance, Sam sells some bonds and reinvests the funds into stocks to return the balance to 35% stocks and 65% bonds.

Advantages and disadvantages of rebalancing

Rebalancing helps keep your investment portfolio aligned with your financial goals.

Advantages:

  • It keeps risk under control in your portfolio.
  • It helps remove emotion from investing decisions.

Disadvantages:

  • Accurate calculations are necessary to successfully rebalance your portfolio.
  • With a smaller portfolio, the cost of constantly buying and selling can be expensive.

How Wealthsimple approaches rebalancing

We automatically rebalance your managed portfolios due to deposits, withdrawals, or changes in your overall goals. This helps ensure your asset allocation stays consistent with what you initially set up.

Price changes in your holdings, however, require more consideration when rebalancing. At Wealthsimple, if your portfolio's asset allocation differs from the original plan by more than 30%, we'll rebalance it by the next business day.

Note: There might be a delay in trading due to corporate actions. Corporate actions typically take between 1 to 6 business days (or more) to fully process. Until then, we might not be able to trade your account. We do our best to minimize this wait time, but for some corporate actions, we have to wait for our clearing brokers to provide us with the new shares.
Example: Charlie has a portfolio where Canadian equities are set to 10% of their portfolio's asset allocation.
  • If Canadian equities increase in price to a 13% or more weighting (relative to other investments held), we'll rebalance the portfolio by selling some Canadian equities.
  • Similarly, if Canadian equities drop to a 7% or less weighting (relative to other investments held), we'll rebalance the portfolio by buying more Canadian equities.

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