01 / DRIFT MECHANICS
Risk Exposure Creep
Because equities historically grow faster than fixed income, a portfolio constructed with an 80% stock / 20% bond allocation will naturally drift toward 90% or 95% equities after an extended bull market. When that happens, your portfolio's downside risk exposure expands significantly beyond your intended tolerance band. When the inevitable market correction strikes, you experience the severe drop of an aggressive 95% equity portfolio rather than the protected profile you designed.
02 / REBALANCING TRIGGER BANDS
The 5/25 Tolerance Rule
Rebalancing too often (such as monthly) incurs transaction friction and administrative burnout, while rebalancing too rarely allows dangerous drift. Institutional evidence favors threshold rebalancing using the 5/25 rule: Rebalance whenever an asset class deviates by 5% absolute (e.g., an 80% equity target drops below 75% or rises above 85%) OR 25% relative to its target allocation (for smaller allocations, such as a 10% emerging markets target drifting to 7.5% or 12.5%).
03 / CASH-FLOW REBALANCING
Zero-Tax Natural Rebalancing
The single most tax-efficient way to rebalance is to avoid selling appreciated assets altogether. When you contribute new cash from regular savings or deploy accumulated dividend payments, direct 100% of those incoming funds into whichever asset class is currently underweight. This restores your target asset allocation smoothly without triggering realized capital gains, capital gains inclusion taxes, or unnecessary transaction friction.
04 / ASSET LOCATION EFFICIENCY
Sheltering High-Tax Assets
Asset allocation is what you own; asset location is where you hold it. In Canada, interest income from bonds and GICs is taxed at your full marginal rate (up to 53.5% in high brackets), making the RRSP or RRIF the optimal tax shelter for fixed income. Canadian dividend-paying equities benefit from the federal Dividend Tax Credit and can be held in taxable non-registered accounts, while maximum capital growth assets belong in the tax-free TFSA.
05 / TAX-LOSS HARVESTING (TLH)
Turning Drawdowns into Tax Deductions
In taxable non-registered accounts, market corrections provide a valuable opportunity to execute Tax-Loss Harvesting (TLH). By selling an index ETF currently trading below your Adjusted Cost Base (ACB), you crystalize a capital loss that can offset taxable capital gains realized elsewhere this year, carried back 3 calendar years, or carried forward indefinitely to shelter future profits.
06 / SUPERFICIAL LOSS RULES
Avoiding the 30-Day CRA Trap
Under CRA regulations, if you sell a security for a loss and you (or your spouse, or a corporate entity you control) repurchase the "identical property" within 30 days before or after the settlement date, the capital loss is denied under the Superficial Loss Rule. To harvest losses successfully without exiting the market, switch to a non-identical substitute index ETF tracking a different underlying benchmark (such as switching from Vanguard VEQT to iShares XEQT).
