Selling Stocks Is Acceptable When You’ve Earned Enough to Purchase What You Desire

Why Everyone Should Consider Stock Investments

While stock investments don’t have an immediate tangible value like real estate or artwork, they can offer dividends and opportunities for capital gains. Historically, the S&P 500 has given approximately 10% returns annually since 1926.

Moreover, once you’ve achieved sufficient returns, it’s wise to cash out some stocks to fund your desires. After all, the primary purpose of investments is to aid in achieving our life goals.

To illustrate, stocks aren’t something you can physically use like a house, piece of art, or wine. Their value only materializes when you decide to cash them in. They’re essentially a tool to achieve financial milestones.

Key Purchases After Cashing Out Stocks

People have various motivations for selling their stocks. Setting aside the speculative approach of predicting market movements, here’s an insight into what returns from the S&P 500 have looked like since 1980: despite an average 14% drop intra-year, 76% of these years showed positive annual returns.

Here’s a glimpse of potential reasons to sell stocks:

1. Buying a Vehicle: If your stock investments have flourished enough to buy a car outright, it might be the right time to sell. However, ensure you’re not overspending, especially given that stock markets generally rise. When buying a car, consider its true necessity and aim for value for money.Example: Want a $38,000 car? Ideally, have that amount or more in stock gains. Paying outright is ideal, but financing options exist if they align with your monthly income. Personally, the thought of liquidating stocks for a car was unsettling; I kept a modest car for 14 years due to this.
2. Funding Higher Education: Parents ideally begin saving for their child’s college right from birth. 529 plans and Roth IRAs are effective vehicles for this purpose. Moreover, ensure the value of the degree is worth its cost. Remember, when you use stocks for tuition, you’re essentially reallocating your assets.A significant challenge might be the temptation to not fully utilize the 529 funds, perhaps hoping for scholarships or cheaper colleges. Unused 529 money can be transferred to Roth IRAs or to a different beneficiary.
3. Purchasing a Home: This is a primary reason many liquidate stocks. Historically, real estate has grown around inflation rates plus 1-2% annually. This means trading stocks for property often entails moving from high to relatively lower returns. However, real estate has its unique perks and stability.Fear of property devaluation? Opt for homes with inspection contingencies. If remodelling, prioritize expansion and essential areas like kitchens and bathrooms.A personal anecdote: A once-desired home became available for 14% less than its earlier asking price. The catch? It required selling substantial stock holdings.
4. Managing Emergencies: Everyone should ideally have a six-month living expense buffer. For emergencies surpassing this, selling stocks can bridge the gap.
5. Sustaining Retirement: One core reason we invest in stocks is to ensure a comfortable retirement. Over time, it can be challenging to sell stocks, hence many lean towards dividend-earning stocks. In retirement, diversifying income sources is crucial. Stock sales might be a primary or supplemental source, but it’s essential to be aware of tax implications.Selling stocks at a younger age can feel like a missed opportunity. Personal experience suggests younger retirees might explore alternative income streams. However, as age advances, it becomes relatively easier to cash out.

Which Stocks to Sell: Winners or Losers?

Active investors often grapple with this. Generally, successful stocks continue their upward trajectory, while underperforming ones might continue to dip. It might be wise to offload underperforming stocks first, benefiting from tax deductions. If that’s not sufficient, some profitable stocks might need to be sold, ideally balancing out capital gains and losses.

For those invested in indices like the S&P 500, remember that selling might mean missing out on future gains about 76% of the time. Diversifying and not keeping all your eggs in one basket, especially company stocks, is also advisable.

An Alternative: SBLOC

If selling stocks feels premature, consider a Security-Based Line of Credit (SBLOC). This allows you to borrow against your stocks, akin to a home equity line of credit.