The past year was a standout for financial markets. Stock markets surged, retail trading boomed, and optimism seemed to drive investment decisions.

Whether you’re a new or experienced DIY investor, it’s easy to get swept up in the excitement of a bull market run and lose sight of your long-term investing strategy. Achieving your financial goals requires understanding yourself as an investor, knowing your risk tolerance, and ensuring your portfolio remains balanced and aligned with your time horizon.

Knowing how a balanced portfolio works, why portfolios drift and how to rebalance effectively is essential to meeting your financial goals.

What is portfolio rebalancing?

A balanced portfolio involves allocating investments across various asset classes, such as stocks, bonds, and cash, in ratios that align with your risk tolerance, time horizon, and investment strategy. For example, a younger investor may prioritize like stocks for growth potential, while older investors often favour fixed-income investments like bonds to reduce risk and preserve the earnings accumulated from investing.

Over time, market fluctuations, sector performance, global events, and trends can cause this mix —known as asset allocation — to drift away from the target asset mix and risk level that you started with. This phenomenon is called portfolio drift.

Portfolio rebalancing addresses this drift by restoring your original asset allocation. This involves buying or selling assets to bring your investment portfolio back to its target balance. Think of rebalancing as a routine check-up for your investments — similar to steering a car back on course after a slight deviation. By reviewing and adjusting your investments periodically, you ensure your portfolio stays on track with your risk tolerance and goals as you continue on your investing journey.

Why does portfolio drift occur?

Several factors contribute to portfolio drift:

• Market performance: As of 2024, the TSX has grown by 21.54 per cent. For Canadians with TSX-focused investment funds or stocks in their portfolios, this surge might mean the overall value of stocks in their holdings has risen significantly, while may have declined.
  A portfolio favouring these TSX stocks could yield higher returns but exposes you to greater market volatility. Remember, this deviation from your original asset mix and risk level could leave you vulnerable to a bear market or a sudden drop in stock prices.
• Seasonal trends: Short-term events can also change your portfolio’s balance. The Santa Claus Rally, where stock prices often rise during the final week of December or the January Effect, where stocks, especially small-cap equities tend to perform well at the start of the year, could also impact your asset allocation.
• Political and economic events: Major political or economic changes can have a big impact. For example, the outcome of 2024 US election has caused the US stock markets to surge and interest in alternative investments like crypto to increase significantly. While these changes may offer growth opportunities, they also introduce risks tied to global trade, increased speculative trading, regulatory changes, and market uncertainty.

Why should you rebalance your investment portfolio?

By routinely rebalancing, you ensure your portfolio is well-diversified, a cornerstone of sound investing. For those implementing a specific investment strategy, rebalancing can help maintain your strategy.

Monitoring your portfolio also becomes especially important during significant market swings. According to Vanguard’s 2020 study titled “The Value of Advice: Assessing the Role of Emotions,” investors with clear financial goals were more likely to stick to their strategies during turbulent times. The research showed that following a plan reinforced long-term thinking and helped investors avoid chasing short-term gains out of FOMO (fear of missing out).

How and when should you rebalance your portfolio?

Timing when to rebalance is just as important as the process itself. Studies show that a planned approach to monitoring investments reduces the risk of overconcentration in a single asset or sector. Here are three common approaches:

• Calendar rebalancing
  This approach involves reviewing your portfolio allocation at regular intervals such as quarterly, semi-annually, or annually. However, one critical aspect to remember is that rebalancing too frequently or infrequently can be inefficient. Rebalancing too often may result in higher transaction costs and larger tax implications, especially in taxable investment accounts. On the other hand, rebalancing too infrequently can cause your portfolio to drift too far from the target allocation over time.
• Threshold-based rebalancing
  This method, which is sometimes used by asset managers, allows your portfolio allocations to drift within a tolerance threshold. Rebalancing only occurs when the value in your portfolio exceeds this range. For example, if your target allocation within your portfolio for equities is 60 per cent, the threshold-based approach would require rebalancing if the equity allocation exceeds 65 per cent or falls below 55 per cent.
  One drawback of this method is that threshold rebalancing requires frequent monitoring, which may not be practical for some DIY investors.
• Hybrid rebalancing
  Hybrid combines the calendar-based and threshold-based approaches. Asset allocation weights are checked at regular calendar intervals, but changes are made only if your investments have drifted beyond your target percentages by a certain amount.

Successful investing isn’t about perfect timing or chasing market trends. It is about making informed, disciplined decisions that align with your unique financial journey. Your portfolio is more than just numbers — it’s a reflection of your goals and long-term vision. By staying proactive and periodically rebalancing, you can keep your investments on track for long-term success.

Why not give a gift that goes beyond the ordinary this holiday season? As we gather to celebrate the season, inspire your loved ones with tools and resources that can help them build a strong financial future. According to a CIBC’s Financial Literacy and Preparedness Report, 60 per cent of Canadians expressed a desire to boost their financial knowledge. During the holidays, it’s the perfect time to spark conversations and empower those around you to take meaningful steps toward lasting financial independence.

Here are a few ways to encourage your loved ones to take charge of their financial future:

1. Introduce loved ones to the basics of investing

Investing can seem intimidating, especially for beginners. Start by discussing their dreams and plans for the coming year. Whether it’s saving to buy a home, pursuing personal passions, or maybe even planning for retirement, these conversations can lead to investing for the future.

Part of that discussion could be the importance of risk tolerance. Encourage them to assess their comfort with market ups and downs by learning through the ASC’s various resources and tools, including a CheckFirst risk tolerance quiz. This quiz provides insights that can help someone select investments that align with their personal financial preferences and goals.

Help friends and family see the value in tools like goal-tracking apps or financial planners to help keep them on track. These can help them stay accountable, monitor progress, and adjust plans as needed, making the journey toward achieving their goals both manageable and motivating.

2. Give the gift of compound interest

Explain the concept of compound interest, which allows investments to grow exponentially over time. Interest is calculated on the initial principal and the previously accumulated interest. Showing examples of how small contributions today can lead to significant growth in the future can make investing feel achievable and exciting.

Introduce them to CheckFirst’s compound interest calculator, an excellent tool for everyone to understand where they are and what they need to do to build a financially successful future. The website also offers free tools, articles, and in-person and virtual programming to build and strengthen investment literacy throughout the year.

3. Start a conversation about future goals

With the new year just around the corner, the holiday season is also a great opportunity to reflect on the past year and plan for the future. Talk with your loved ones about their specific financial goals. Identifying whether their goals are short-term or long-term is an essential step, as this determines the type of investment accounts, funds, and strategies they’ll need.

For short-term objectives, like saving for a house, options such as a First Home Savings Account (FHSA) or an RRSP Home Buyers’ Plan are designed to help achieve this efficiently.

On the other hand, long-term goals like retirement savings may benefit from accounts such as a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP). Here, investments with the potential for higher returns, such as exchange-traded funds (ETFs), mutual funds, or stocks, could offer more growth over time.

Investing in the financial literacy of your loved ones can help them take control of their finances and start achieving their dreams. But, if you’re unsure about providing advice, you can also consider gifting a small contribution to a registered investment account like a TFSA or RESP. It’s a thoughtful and practical way to help loved ones take their first step toward their financial goals.

Over the last few years, inflation and the rising cost of living, stagnant wages and seemingly unattainable housing prices have created a perfect storm of financial stress worldwide, including for many Canadians. These pressures have sparked a growing wave of financial anxiety for many. This has led many to question whether traditional financial advice still applies or if planning for the future is even worthwhile.

But despite these challenges, it’s crucial to remember that thoughtful steps and an understanding of how markets work can help you build a more positive outlook toward your finances. This Financial Literacy Month, consider the theme “Money on Your Mind: Talk About It!”, and use this month to rethink your relationship with money. Instead of feeling financially nihilistic or overwhelmed, enhance your financial literacy and set clear, achievable goals that will empower you to make confident choices that support your future.

Learn how market cycles work

One of the most important basics to understand is how markets behave over time. The saying “what goes up must come down” has a parallel in economics — all markets go through boom-and-bust cycles. In a free market economy, like ours, the cycles are integral to the system. The downturns or the dips in the market are natural and should be expected throughout your investing journey. Downturns allow the market to self-correct, adjusting the values of companies and sectors based on financial performance, economic conditions like interest rates and future growth potential. Although these dips can be unsettling, history shows that downturns are temporary, typically lasting between 12 to 48 months. Ultimately, the free market rewards innovation, patience and strong business fundamentals, eventually leading to new periods of growth.

When thinking of an economic dip, many might recall the dot-com bubble of the 1990s, which wiped out $5 trillion in Nasdaq value, or the 2008 financial crisis, the most severe downturn since the Great Depression. Yet, these weren’t permanent slumps. The post-downturn markets didn’t just recover. The rebound was significant; within a decade of the 2008 crisis, the S&P 500 returned approximately 450 per cent, including dividends. Recognizing this market resilience can help you stay steady through challenging times and mitigate the urge to rush into emotional, short-term decisions.

Categorize your financial goals

In times of financial stress, goals — whether taking a gap year, going on vacation, or buying a home — can feel unattainable. For many, this sense of hopelessness fuels a “nothing to lose” mentality, which can lead people to take on excessive risk or choose investments that don’t align with their actual financial goals. The rise of meme stocks is a recent example of this trend. In 2021, the CEO of the UK’s Financial Conduct Authority (FCA) observed that younger investors increasingly viewed investments as entertainment that drove them to invest in speculative assets with little or no underlying company fundamentals.

To regain control over your finances and create a sense of progress, organizing your financial goals into categories — such as short-term, medium-term, and long-term — can make them feel more achievable. This approach can also help you match each goal with the right investment option, giving you a clear roadmap and reducing the impulse to make emotional choices.

An effective strategy could be to break down long-term goals into smaller, more achievable milestones. With this approach each milestone builds on the last, creating momentum and a structured path toward your larger objectives.

Evaluate your financial information sources

The digital age has transformed how we consume financial information. A Canadian Securities Administrators Investor Index survey found that 53 per cent of Canadians use social media for investment information. Among investors aged 18-24, this number jumps to 82 per cent, with YouTube, Instagram, and TikTok leading the way.

While social media has made access to financial information easier, these platforms are programmed to prioritize content over sound financial analysis. Algorithms are programmed to act as echo chambers, amplifying users’ beliefs by presenting similar content repeatedly. This can lead to biased views or could further feed into existing financial anxieties.

Take time to critically evaluate the credibility and qualifications of the individual offering you financial advice. Focusing on reliable, unbiased information will help you build a more balanced and nuanced outlook on your financial future. Remember, social media often portrays an idealised version of real life, which can create an unhealthy sense of FOMO (Fear of Missing Out).

Financial Literacy Month is the perfect opportunity to develop a healthy relationship with your money. Starting with the basics and understanding the fundamentals can empower you to shift from financial nihilism to a more confident mindset—understanding that while you may not control the market, you can control your approach to it.

Diversification is a cornerstone of a sound investment strategy. At its simplest, the concept is often likened to the adage “Don’t put all your eggs in one basket”. Investing in different types of assets (like stock, bonds, real estate, different industries, and geographic regions helps to reduce the overall risk of an investment portfolio. Most Canadian investors use investment funds to diversify their portfolios and mitigate investment risks. However, a June 2024 study by Vanguard highlighted a common bias among Canadian investors: a preference for domestic stocks, known as home bias.

Investing in a market that feels familiar is not a trend unique to Canada. Home bias is a global phenomenon. But the overreliance on investments from a single country can be limiting. Home bias can expose a portfolio to assets that are dependent on common factors — including the political, economical, and technological stability of the country. This is where diversifying internationally can be beneficial.

October is Investor Education Month, the perfect time to reassess your strategies and deepen your understanding of fundamental investment concepts like diversification. Before investing beyond Canada, ensure you learn and understand all your options and consider how diversification can benefit your investment portfolio.

Canadian market vs. the global market

The Canadian market is known for its stability, resilience, and strong regulatory oversight. However, investing exclusively in Canada can come with limitations. The Canadian stock market is relatively small. According to a 2023 global equity market study by the Securities Industry and Financial Markets Association (SIFMA), Canada accounted for only 2.7 per cent of world capital markets. This means that over 97 per cent of the world’s investment opportunities are located outside Canadian borders. Investing in international markets can provide Canadian investors with an opportunity to benefit from the size and scale of the global economy.

Canada’s market concentration

Canada is the ninth-largest economy in the world, with key industries like manufacturing of products such as paper, technology and automobiles and natural resources including mining, oil and gas and agriculture playing a critical role in the country’s economy. This industrial focus is strongly reflected in Canada’s capital market. As of August 2024, almost half of the S&P TSX Composite Index — which includes the largest companies listed on Canada’s primary stock exchange — is mainly comprised of two sectors: financial institutions, such as banks, and energy, including oil and gas resources. Similarly, the Canadian Securities Exchange Composite Index is dominated by life sciences, followed by mining.

Due to this concentration in Canadian public equity markets, investors who invest solely in their home country may miss out on opportunities in sectors that are growing more significantly in other countries. By diversifying internationally, Canadian investors can gain exposure to other sectors that are driving global economic growth and innovation.

The rise of emerging markets

Many Canadian companies have a strong tradition of paying consistent dividends, which may appeal to investors seeking a steady income. However, the capital markets in some developing nations, commonly referred to as emerging markets, often offer attractive opportunities due to their rapid economic growth and potential for higher returns. In fact, a Goldman Sachs report suggests that these emerging markets are projected to overtake the U.S. by 2030. In a June 2024 paper, Franklin Templeton highlighted that emerging economies have become more resilient and less vulnerable to fluctuations. It is important to remember that emerging markets do carry increased investment risks — including political instability, regulatory uncertainty, lack of liquidity and currency volatility. Before investing in these markets, consider talking to a registered financial advisor who understands your risk tolerance, your investment goals and time horizon.

Tactics to diversify your investment portfolio

1. Explore global or international market funds: Globally or internationally focused investment funds, including ETFs, can provide access to a wide range of global securities. This enables you to easily diversify your investment portfolio across the global economy.
2. Consider a long-term perspective: A long-term approach aligns with the fundamental principle of diversification as different markets tend to outperform others at different times. By maintaining a diversified portfolio, an investor can potentially benefit from growth opportunities across various regions and economic cycles.
3. Rebalance your portfolio regularly: As market conditions change, it’s important to rebalance your portfolio to ensure that your asset allocation aligns with your risk profile and investment goals.

Diversification is a powerful tool for managing risk and potentially enhancing returns. While investing in Canada offers home-country advantages, such as familiarity with local companies and favourable tax treatment, investing across diverse geographies can help build a more resilient portfolio that is better equipped to weather market fluctuations. By taking a long-term view and exploring opportunities in different geographic regions, investors can embrace a holistic approach to diversification and potentially reap its rewards.

For many Canadian investors, investment funds are commonly used to build a diversified portfolio. Diversification in investing means the act of spreading your investment risk across multiple companies and investment types. Investment funds like mutual funds and exchange-traded funds enable investors to pool their money together to invest in a basket of investments like stocks and bonds rather than having to buy each investment directly. To help investors learn more about a publicly available fund, fund issuers are required to provide a prospectus and a fund fact sheet on their websites, which are documents that outline important information about the fund and its managers.

While investment funds are a great way to gain exposure to a range of investments and can help mitigate investment risk, investors need to take the time to properly understand the information contained within the prospectus before buying in. Here are a few things to consider when determining if a fund is right for you.

1. The fund’s objective

A fund’s objective is a high-level overview of what it aims to achieve for its investors. Every publically available fund will include its objective within its prospectus. For example, a fund’s objective could be to track the performance of a particular market segment, provide long-term capital growth or generate regular monthly dividend income, which is profits from the businesses held in the fund, paid to investors for holding shares or units. Investors should ensure that the fund’s objective aligns with their goals and when they will need to withdraw their money before adding it to their portfolio.

2. The fund’s strategy and asset allocation

Reviewing the fund’s policy or strategy is a way to examine how the fund aims to achieve its objectives. Investors can better understand the fund’s strategy by examining the types of sectors, countries, and investments the fund will invest in and the percentage of the fund allocated to each.

Reviewing asset allocation also helps investors avoid inadvertently over-investing in a particular company, country, or sector, which could skew their risk level and overall asset allocation mix for their entire portfolio.

3. The fund’s risk rating and performance

The level of risk that an investor is willing to embrace is a critical component of any investment. Higher levels of risk can potentially provide a more significant return, but it can also increase the chances of losing money.

While past performance is not a guarantee of future performance, investors can also review year-over-year returns and average returns over time to see if the risk and return align with their financial goals.

Finally, if the fund tracks a benchmark index (a list of companies or investments within a market segment), investors should assess how well it compares to its benchmark. Essentially, the closer it matches its benchmark, the more accurate the fund is in providing equivalent returns after fees.

4. The fund’s trading information and fees

Last but not least, investors should take the time to review the trading information for the fund. In this section of the prospectus, investors can confirm important details, including who runs the fund, what exchange the fund is listed on, the currency the fund can be purchased in and the management fees associated with holding shares or units of the fund. It’s essential to recognize that fees can significantly impact the overall returns of your investment. Seeking out funds with lower management fees that align with your goals can help reduce your investment management costs, which can compound over time as your investment grows.

Investment funds can be an essential asset in your portfolio. By reviewing the prospectus information thoroughly, investors can better ensure that they choose funds that align with their risk tolerance, time horizon, and fee expectations.

For many Canadians, investing can seem intimidating or out of reach. Misconceptions, often fueled by jargon, fear or misunderstanding can lead them to either avoid investing entirely, make risky decisions or worse, fall victim to investment scams.

While investing is a continuous financial journey, understanding the basics and starting with strong fundamentals can set you up for success. Here is a look at some common misconceptions about investing and how you can reframe your thinking:

Misconception #1: Investing is like gambling

Pop culture often portrays investing as a fast-paced, high-risk thrill ride. This narrative fuels the long-held belief that successful investing solely involves day trading and playing the market odds for quick profits. For some, this portrayal may seem similar to gambling and can scare them away from investing or lead them to invest in high-risk and unsuitable opportunities.

Though all investments carry some degree of risk, planning an investment strategy with long-term goals vastly differs from gambling for three main reasons:

• Time horizon vs right now: Gambling focuses on immediate results while investing takes a long-term view of growing money over extended periods of time through compounding interest. Emotions and adrenaline shouldn’t dictate investment decisions. With a financial plan in place, investors can approach investing in a mindful and strategic way.
• Informed choice vs chance: Long-term investing considers crucial financial information about the stock, company or fund. You can study a company’s earnings reports, products and services, and leadership before committing to investing your money. In contrast, gambling is simply betting your money on the odds and a healthy dose of luck.
• Ownership vs all-or-nothing: When you invest money into buying a stock, mutual fund, or ETF, your purchase gives you partial ownership of a company. The return on your investment is never an all-or-nothing scenario like in gambling. Investments can deliver returns in the form of interest, dividends, or capital gains. Diversifying your assets to include low-risk options like GICs, bonds, or a basket of investments through a mutual fund or ETF can further help manage risk

Misconception #2: Investing is only for the rich

This is by far the most common barrier to investing. According to CIRO’s 2024 Investor Survey,  six-in-10 non-investors identified not having enough money to invest as one of the things holding them back from investing. For many Albertans, finding room in your budget for investing may seem like a privilege. But modern-day investing has come a long way and is much more affordable.

Gone are the days of expensive stockbrokers and minimum investment requirements. Thanks to advancements like robo-advisors, low cost brokerages, fractional shares and ETFs, you could start investing with as little as $1. Today, the ability to start investing has minimal financial barriers.

An interesting statistic from Ramsey’s 2024 National Study of Millionaires showed that most U.S. millionaires did not inherit any money from their parents or family members. According to the survey, eight out of 10 millionaires came from middle-income or lower-income families. In the same study, three out of four millionaires stated regular consistent contributions lead to success.

Even small investments are worthwhile! Investing can start with small amounts based on your budget and increase as you earn more or are able to allocate more towards your long-term goals.

Misconception #3: It’s too late to invest

The goal of any investor is to maximize profits and earn the best return on their investment, while staying within their risk tolerance and time horizon. A longer time horizon allows your money to compound and grow over time faster. But, this thinking can lead some to believe they’re too late to invest or need to take on excessive risk to catch up.

This isn’t the case. Three key lessons that are critical to your success as an investor involves understanding:

• A financial plan: Regardless of age, having a financial plan in place can help you consider realistic goals and accurate timelines for when you can achieve them. Certified financial planners can help you create an action plan taking into consideration your age, current financial obligations, and risk tolerance.
• Time in the market: Time spent invested and in the market is generally better than time spent staying on the sidelines. Remember, the power of compound interest works regardless of when you start investing.
• Risk and return: Taking on more risk doesn’t guarantee a higher return. Know your personal risk tolerance. This will help ensure you choose suitable investments aligned to the risk you are comfortable taking.

Like the ancient Chinese proverb, the best time to plant a tree was 20 years ago. The second best time is now.

Common misconceptions can skew how you view and approach investing. With a measured approach and a strong foundation backed by investing principals like diversification, risk vs. reward and compound interest, you can start your investing journey on the right path today.