How addressing portfolio “drift” can help you avoid skidding into unwanted risk or lower reward

Your investment portfolio is like a car, carefully balanced for a long journey. You've set the tire pressure, adjusted the suspension, and calibrated the weight distribution for optimal performance and safety. But over time, as you drive through different terrain that careful balance can begin to shift. The same thing can happen with your investment portfolio.

This natural shifting is called portfolio drift, and it can happen to every investor. Understanding what it is and how to address it can help you stay on track toward your financial goals.

What is portfolio drift?

Portfolio drift captures the variance of your portfolio's asset allocation from its original target weights. When you first built your portfolio, you likely chose a specific mix of investments – perhaps 60% equities, 30% fixed income, and 10% cash. This allocation reflected your investment profile: your goals, time horizon, constraints, comfort level with risk – often referred to as your risk tolerance – as well as your risk capacity, or your financial ability to suffer losses.

But markets don't always move in lockstep. Equities might grow 15% in a year while bonds grow only 2%. When this happens, the equity portion of your portfolio naturally expands, taking up more space within your portfolio. For example, when left unchecked, a balanced 60/40 portfolio can drift to a 70/30 allocation. By the end of 2021, a typical 60/40 buy-and-hold portfolio that began at the end of 2016 would have drifted to more than 74% equity exposure.¹

Why portfolio drift matters

This is a fundamental change to your risk profile. When your portfolio drifts toward more equities, you're taking on more risk than you originally intended. If markets turn downward – as they did in 2022 – that excess equity exposure magnifies your losses, likely far beyond what you planned for. Research shows that portfolios that were not rebalanced in 2022 suffered approximately one percentage point higher losses than those with disciplined rebalancing,¹ simply because of excess equity exposure going into the bear market over that year.

On the flip side, if your portfolio drifts too heavily toward fixed income after a market downturn, you miss out on growth opportunities when markets recover. Either direction – too much risk or too little growth potential – can derail your long-term investment plan.

The compounding cost of inaction

Beyond the direct impact on returns, portfolio drift can create what researchers call an "efficiency gap." Portfolio drift is estimated to cost investors between 15 and 32 basis points (a basis point is 1/100^th of a per cent) annually in performance efficiency and risk alignment.² This occurs because as one asset class grows to dominate your portfolio, it reduces the diversification benefit of your other holdings.

There's also a behavioural cost. When your portfolio's risk level no longer matches your comfort level, you're more likely to make emotional decisions during market volatility.³ In 2025, the S&P 500 Index returned 17.88%, while the average equity investor returned only 17.16% – a "behavioural gap" of 72 basis points.⁴ Much of this underperformance may stem from investors reacting emotionally to portfolios that had drifted away from their risk tolerance.

Addressing portfolio drift: rebalancing portfolios

Rebalancing is the process of getting your portfolio back to its original strategic asset allocation. Here's how it works:

• Reviewing your strategic asset allocation: This process start by confirming the asset mix you originally set. This includes the percentage you intended to hold in equities, fixed income, and cash.
• Measuring the drift: Compare your current allocation to your target. Have your equities grown from 60% to 65%? Has your fixed income portion shrunk from 30% to 25%?
• Making adjustments: rebalancing involves two primary actions:
• • Funding the laggards: Directing new contributions into underweight asset classes; and,*
  • Trimming the winners: Selling a portion of your overweight assets and reinvesting the proceeds.

*This method can be the most tax-efficient approach, as it avoids triggering capital gains.

Finding the rebalancing rhythm

Industry research suggests three approaches to timing rebalancing:

• Annual reviews: For most investors, reviewing their portfolios at least once a year provides an effective balance between staying aligned, and avoiding excessive transaction costs. Many choose to do this at year-end, which can also allow for tax-loss selling opportunities in non-registered accounts.
• Threshold-based rebalancing: Rather than rebalancing on a set schedule, some investors choose to rebalance when any asset class drifts beyond a certain threshold. Industry research identifies a 5% absolute threshold as a best practice: if your 60% equity target reaches 65%, you rebalance.⁵ This approach is sometimes called the "5/25 Rule" – rebalancing when an asset class moves 5% in absolute terms, or 25% relative to its original target weight.⁶
• Quarterly or semi-annual reviews: During periods of market volatility, more frequent reviews can help in catching significant drift earlier. This is particularly important during strong bull markets or sharp downturns, when asset values can change rapidly.

The key is to establish a rebalancing discipline and stick to it, rather than trying to time the market, or reacting emotionally to short-term movements.

Keep transaction costs in mind

While rebalancing is important, over-rebalancing can create its own problems. Research from 2025 found that more frequent rebalancing can harm long-term performance by selling outperforming assets too early and increasing transaction costs.⁷ This is why most experts recommend annual reviews or threshold-based approaches rather than very frequent rebalancing.

When rebalancing in taxable accounts, it’s important to consider the tax implications of selling assets with either unrealized gains or losses. Using new contributions to rebalance, or timing sales to take advantage of tax-loss harvesting, can help preserve more of your returns and be more tax effective.

The role of your advisor

Your Investment Advisor is an essential strategic partner in managing portfolio drift. They can help you:

• Monitor your portfolio regularly to identify when drift occurs;
• Understand whether your investment profile still reflects your current goals and risk tolerance;
• Execute rebalancing efficiently, considering tax implications, and transaction costs; and,
• Adjust your target allocation if your life circumstances or goals have changed.

Crucially, your Investment Advisor acts as your objective anchor during market volatility, helping you avoid the emotional decisions that often widen the behavioural gap between market returns and investor returns.

Gain traction – and get back on track to your plan

Portfolio drift is a natural consequence of market movements. It's not a failure of your investment strategy – it's simply evidence that markets are working. The key is to recognize when drift has pushed your portfolio away from your intended risk level and take action to bring it back into alignment.

Portfolio drift can create risk you never intended to take. Consider bringing your strategy back into alignment by connecting with your Investment Advisor to re-evaluate your portfolio and safeguard your long-term goals.

Sources

1.Morningstar. “How portfolio rebalancing has helped investors in 2022.” https://www.morningstar.com/portfolios/how-portfolio-rebalancing-has-helped-investors-2022.

2.US Tech Automations. “Your Clients' Portfolios Are Drifting Right Now.” https://ustechautomations.com/resources/blog/portfolio-rebalancing-automation-pain-solution.

3.RBC Royal Bank of Canada. “Understand Investment Risk to Know What’s Right for You.” https://www.rbcroyalbank.com/en-ca/my-money-matters/inspired-investor/investing-academy/understand-investment-risk-to-know-whats-right-for-you/?msockid=31bda4d2e08664f822c0b135e17e6554

4.PR Newswire. “Dalbar's 2026 QAIB Report Shows Narrower Investor Gap Amid a Complex and Volatile Market Year.” https://www.prnewswire.com/news-releases/dalbars-2026-qaib-report-shows-narrower-investor-gap-amid-a-complex-and-volatile-market-year-302745998.html

5.RBC Dominion Securities. “Portfolio Management: Rebalancing discipline.”  https://wealthwise.rbc.com/docs/ad17e282-a117-461b-9920-aafb7e3fd4af.pdf

6.Swedroe, Larry E. Think, Act, and Invest like Warren Buffett. 2013.

7.Advisor Perspectives. “What is the optimal portfolio rebalancing strategy.” https://www.advisorperspectives.com/articles/2025/04/29/what-optimal-portfolio-rebalancing-strategy.