If you are the type of investor who likes to maintain a defined balance between stocks and bonds in your portfolios, 2026 is shaping up to be a doozy for rebalancing efforts.

That’s because stocks and bonds have produced vastly different returns so far, and both markets face significant headwinds.

The iShares Core Equity ETF Portfolio (ticker: XEQT) – a Canadian-listed exchange-traded fund that provides one-stop exposure to over 8,000 stocks worldwide, hedged to Canadian dollars – is up 14.5 per cent in 2026.

Bonds are another story (and a big one).

The yield on the 10-year U.S. Treasury bond blasted through a 19-year high of 5.2 per cent last week. This illustrates the broader struggles of the global government bond market as investors react to inflation, rising government debt levels and massive bond issuance by hyperscalers.

As a result, ETFs that provide cheap and diversified access to the bond market have been hit pretty hard.

The iShares Global Government Bond Index ETF (ticker: XGGB), an all-bond fund with a 41-per-cent weighting toward U.S. Treasuries, has slumped 5.4 per cent this year (not including distributions).

That puts the performance of stocks and bonds, as represented by these two funds, about 20 percentage points apart in 2026 alone. That is substantial and means that diversified portfolios could be in need of a serious tweak to maintain desired weightings.

Rebalancing today would suggest selling some stocks and buying bonds. Tax implications aside, it doesn’t have to be more complicated than that.

“I have retired clients who have had the bulk of their money in equities and have three to four years’ worth of living expenses in bonds. If they’re feeling vulnerable in this environment, I’ll absolutely sell some stocks and buy some bonds,” said Matt Manara, executive vice-president and portfolio manager at Avenue Investment Management.

The trick is how, given the challenges in the bond market.

Relax, the income part is safe. U.S. and Canadian governments are unlikely to default on their bonds, making them essentially risk-free and ensuring investors can count on receiving income without interruption.

Bond prices, though, could remain under pressure. Some observers caution that the issues weighing on bonds this year – particularly government debt levels – could endure for some time. But staying put in a portfolio that is heavily tilted in favour of stocks comes with risks as well.

The frenzy over artificial intelligence is still going, raising concerns about stock valuations. Even Canadian bank stocks have been on a tear this year, pushing their valuations to unusually high levels.

Fortunately, there are solutions to this conundrum. One safety-first approach, which I mentioned in a column on Saturday, involves buying short-term bonds – or even money market funds, which are essentially cash equivalents – that are less sensitive to rising interest rates.

There are plenty to choose from. Two examples: The Vanguard Canadian Short-Term Bond Index ETF (ticker: VSB ), which invests in a mix of government and investment-grade corporate bonds; and the BMO Short Corporate Bond Index ETF (ticker: ZCS), which is focused on corporate debt issues.

But investors with different risk profiles and investment horizons are clearly going to have vastly different approaches to their portfolios.

Are you rebalancing? How are you doing it? Let me know at dberman@globeandmail.com.