Topic: Investing Deep Dive · Part 2 of 8 · ⚫ Expert

In one sentence

Asset allocation is how you split your money between stocks and bonds, and rebalancing is how you bring that split back to target when it drifts.

Words to know

• Stocks (equities): small pieces of companies. They can grow a lot over time, but they can also drop a lot in a short time.
• Bonds (fixed income): loans to governments or companies that pay interest. They usually move less than stocks.
• Asset allocation: your mix, for example “60% stocks, 40% bonds”.
• Risk tolerance: how much of a drop you can live with, in money and in feelings, without selling in panic.
• Rebalancing: buying or selling to bring your mix back to your target.

Step 1: Start with your goal and your time

Ask: when will I need this money? Money for a goal in 2 years is very different from money for retirement in 30 years.

• Under about 3 to 5 years: many people keep this money in savings or GICs, not stocks. A big drop could arrive just when you need the money.
• Many years away: you have time to wait for markets to recover, so more stocks may fit.

Step 2: Be honest about your risk tolerance

Imagine your $10,000 is worth $7,000 after a bad year. Would you hold on, or sell? Stock markets have fallen 30% or more several times in history. Your mix should be one you can keep during a fall like that.

Think about your income too. A steady job and an emergency fund make it easier to wait out a drop.

Step 3: Look at sample mixes

These are illustrative mixes only, to show how the idea works. They are not advice for you.

Sample mix	Stocks / bonds	Often matches	In a bad year
Conservative	40 / 60	Shorter time, low comfort with drops	Smaller drops, slower growth
Balanced	60 / 40	Medium time, medium comfort	Medium drops
Growth	80 / 20	Long time, good comfort with drops	Bigger drops
All equity	100 / 0	Very long time, high comfort with drops	Biggest drops, highest expected growth

Within the stock part, many Couch Potato portfolios hold Canadian, U.S. and international stocks for diversification.

Step 4: Choose how you will rebalance

There are two common methods. Pick one and write it down.

• Calendar rebalancing: check once a year on a fixed date, like your birthday. Rebalance if the mix has drifted.
• Threshold rebalancing: rebalance only when a part drifts past a band. For example, a 60% stock target with a 5-point band means you act below 55% or above 65%.

Calendar is easier to remember. Threshold means fewer trades in calm years. Rebalancing too often adds trading costs and, in a taxable account, can create taxes.

Step 5: Rebalance with new money first

The easiest way is to put new contributions into the part that is below target. You buy what is “on sale” and you do not need to sell anything. In a non-registered (taxable) account, this avoids selling and paying tax on gains.

If you hold one asset allocation ETF, the fund rebalances for you. You only need to keep adding money.

Example

Your target is 60% stocks and 40% bonds. You start with $10,000:

• Stocks: 60% × $10,000 = $6,000. Bonds: 40% × $10,000 = $4,000.
• After one year, stocks grow 20%: $6,000 × 1.20 = $7,200. Bonds stay flat at $4,000.
• Total: $7,200 + $4,000 = $11,200. Stocks are now $7,200 ÷ $11,200 ≈ 64.3%.

Calendar method (selling): target stocks = 60% × $11,200 = $6,720. Sell $7,200 − $6,720 = $480 of stocks. Buy $480 of bonds. Bonds become $4,480, which is 40% of $11,200.

Threshold method (5-point band): 64.3% is still under 65%. You do nothing this year.

New-money method: you add $1,000. The new total is $12,200. Target stocks = 60% × $12,200 = $7,320, so put $7,320 − $7,200 = $120 into stocks. Target bonds = 40% × $12,200 = $4,880, so put $4,880 − $4,000 = $880 into bonds. Check: $120 + $880 = $1,000. You are back on target without selling anything.

Common mistakes

• Picking a mix based on last year’s returns instead of your goal and time.
• Never rebalancing, so a 60/40 mix slowly becomes 75/25 without you choosing it.
• Rebalancing every week. It adds costs and rarely helps.
• Counting only one account. Your mix is all your investment accounts together (TFSA, RRSP, FHSA and others).

✅ My checklist

☐ I know when I will need this money.
☐ I picked a stocks/bonds mix I could keep during a 30% stock market drop.
☐ I chose calendar or threshold rebalancing and wrote down my rule.
☐ I send new money to the part that is below target first.
☐ I look at all my accounts together when I check my mix.

Next in this topic → Part 3: How to choose an ETF

Back to the topic → Investing Deep Dive

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There are no affiliate or referral links in this post. This is general information, not financial, tax or legal advice; everyone’s situation is different. Figures were checked in October 2026 and can change.

Sources: iShares Canada: About asset allocation ETFs · Vanguard Canada: Vanguard Balanced ETF Portfolio (VBAL) · Vanguard Canada: Vanguard Growth ETF Portfolio (VGRO) · OSC GetSmarterAboutMoney: Types of ETFs