How to Rebalance Your Portfolio Without Selling Investments

Over time, the values of different assets in your portfolio can change due to market performance. These fluctuations may increase your risk or move away from your investment goals, which is why regular rebalancing is important. If you are concerned about the tax and cost implications of selling investments to rebalance, there is no need to worry. It is possible to rebalance your portfolio without selling your investments when you employ certain strategies.. This allows you to maintain your desired allocation while reducing tax consequences and transaction fees. If your portfolio has recently changed to market changes, this is how to rebalance your portfolio without selling your 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 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. That shift can expose you to more risk than you originally intended, but rebalancing could bring your portfolio back in line with your original investment strategy.

How to Rebalance Without Selling Investments

It is 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.

There are certain rebalancing strategies you can use to avoid selling your investments.

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, such as 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 your portfolio without selling may take longer to achieve your desired allocation, it is still a tax-efficient and cost-effective way to manage your portfolio.

When Should You Rebalance Your Portfolio?

A senior couple determining how to rebalance their portfolio.

There is no single rule for how often you should rebalance your portfolio, but following a consistent schedule or threshold can help you stay on track with your target asset allocation.

Many investors rebalance on a fixed interval, such as quarterly, semi-annually or annually. This approach ensures that your portfolio does not drift too far from your intended risk level due to market movements.

Another popular approach is threshold-based rebalancing, which involves rebalancing only when an asset class deviates by a set percentage (e.g., 5% or more) from its target allocation. For example, if your plan calls for a 60/40 portfolio (60% stocks and 40% bonds), you might rebalance if stocks grow to 65% of your portfolio.

Market volatility can also trigger unscheduled rebalancing. Large market swings, such as a sharp rally or market downturn, can quickly distort your allocation. It is important not to overreact to short-term market noise to avoid emotional investing. Still, reviewing your portfolio after significant events can help ensure it still aligns with your long-term strategy.

Tax Considerations of Selling vs. Not Selling

One of the biggest benefits of rebalancing without selling is avoiding capital gains taxes. In taxable accounts, selling appreciated assets can trigger a tax bill, which can reduce your overall returns.

The overall tax impact depends on how long you have held the asset.

Short-term capital gains: Short-term capital gains are assets held for one year or less. They are taxed as ordinary income, which could be as high as your top income tax rate.
Long-term capital gains: Long-term capital gains are assets held for more than one year. They are taxed at a lower rate, which is typically 0%, 15% or 20%, depending on your income.

Rebalancing within tax-advantaged accounts like a 401(k) or IRA avoids this issue entirely, since trades in these accounts do not trigger taxable events. This is why many investors prioritize rebalancing in retirement accounts first, while using strategies like redirecting new contributions or dividends to rebalance taxable accounts.

Bottom Line

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

A financial advisor could help you rebalance your portfolio without selling investments based on your overall tax liability.

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.