How to Rebalance Your Portfolio Without Selling Investments

Over time, the values of different assets in your portfolio can change due to market performance, which may increase risk or move away from your investment goals. This is why regular rebalancing is important. If you’re concerned about the tax and cost implications of selling investments to rebalance, there are ways to do so without selling. This allows you to maintain your desired allocation while reducing tax consequences and transaction fees. Here’s how to rebalance your portfolio without selling investments.

If you need help building and managing an investment portfolio, consider working with a financial advisor .

How Portfolio Rebalancing Works

Portfolio rebalancing is the process of realigning the weightings of the assets in your investment portfolio to match your desired asset allocation . This typically involves selling overperforming assets and buying underperforming ones to reach that goal.

One common example can happen when stocks outperform bonds . This can make your portfolio weighted more heavily in stocks than you initially intended. And the shift can expose you to more risk than you might be comfortable with. Rebalancing could then bring your portfolio back in line with your original strategy.

How to Rebalance Without Selling Investments

It's possible to rebalance your portfolio without selling investments. This approach is particularly appealing to investors who want to avoid capital gains taxes , especially in taxable accounts . By rebalancing without selling, you can maintain your desired asset allocation while minimizing transaction costs and tax liabilities.

Here are five general strategies to help you rebalance without selling:

• Redirect new contributions. One of the simplest ways to rebalance without selling is to redirect your new contributions to the underweighted asset classes. For example, if your portfolio is too heavily weighted in stocks, you can direct new contributions to bonds or other asset classes until your portfolio reaches the desired balance. This strategy allows you to gradually rebalance your portfolio over time while reducing transaction fees or capital gains taxes.
• Adjust dividend reinvestment. If you receive dividends from your investments, consider adjusting your dividend reinvestment strategy . Instead of reinvesting dividends back into the same asset, you can allocate them to underweighted asset classes.
• Reallocate within tax-advantaged accounts. If you hold assets in tax-advantaged accounts like a 401(k) or IRA , you can rebalance by reallocating assets within these accounts. Since transactions within these accounts are not subject to capital gains taxes, you can sell overperforming assets and buy underperforming ones without triggering a tax event.
• Use cash flow to rebalance. If your portfolio is generating cash flow, such as interest or dividends , you can use this cash to purchase underweighted assets. By reinvesting the cash flow into the areas of your portfolio that need adjustment, you can rebalance over time without selling existing investments. This method works well for investors who prioritize income-generating assets and want to maintain their portfolio’s balance without making major changes.
• Harvest losses to offset gains . If you have assets in your portfolio that have lost value, consider selling them to offset gains from other investments. While this does involve selling, it can be part of a broader strategy to rebalance without triggering significant tax liabilities.

While rebalancing without selling may take longer to achieve the desired allocation, it offers a tax-efficient and cost-effective way to manage your portfolio.

Bottom Line

Rebalancing your portfolio is key to maintaining your investment strategy, but it doesn’t always require selling assets. You can rebalance by redirecting new contributions, adjusting dividend reinvestments, or reallocating within tax-advantaged accounts. These methods could help you keep your portfolio aligned with your goals while avoiding the costs and tax consequences of selling investments.

Investment Planning Tips

• Working with a financial advisor can help you analyze and manage investments for your portfolio. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now .
• If you want to calculate how much your investments could grow over time, SmartAsset's free calculator could help you get an estimate .

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