Everyone should consider holding some portion of their investments in stocks. While stocks themselves don’t offer direct utility, they can provide dividend income and the potential for capital gains. Historically, since 1926, the S&P 500 has delivered an average annual return of around 10%.
Moreover, at some point, it’s wise to cash in on your stock investments to enjoy the fruits of your labor. If you don’t utilize your investment gains, the purpose of investing in stocks becomes moot.
Unlike tangible assets like real estate, which you can physically use, or collectibles like art and fine wine, which you can display or consume, stocks don’t offer such direct enjoyment. Therefore, it’s important to remember that stocks serve as a means to achieve your financial goals.
Key Considerations for Selling Stocks
Let’s set aside the notion of selling stocks based on market timing, as predicting market movements is notoriously challenging. Instead, let’s focus on practical reasons for liquidating stock holdings:
1) Buying a car: If your stock investments have grown sufficiently to afford a car, consider cashing in. However, it’s advisable to adhere to prudent financial rules, like my 1/10th rule for car buying, to avoid regrets, especially given the market’s tendency to rise annually.
2) Funding college education: Many parents save for their child’s education using vehicles like 529 plans or Roth IRAs, which offer tax-efficient growth. Selling stocks and bonds within these plans to cover educational expenses is a straightforward process. The key is ensuring that the value of the degree justifies its cost.
3) Purchasing a home: Real estate, while typically offering lower returns than stocks, presents a less volatile investment option. If you’re looking to settle in a place for at least five years, using stock gains to buy a primary residence can be a sound decision. Remember, though, that real estate offers both a place to live and potential appreciation.
4) Addressing emergency expenses: It’s always good to have a financial cushion for emergencies. If an unforeseen expense exceeds your emergency fund, selling stocks might be necessary.
5) Supporting retirement: Often, the primary goal of stock investing is to fund retirement. While it can be hard to start drawing down your investments, especially if you retire early, it’s a necessary step to ensure you can enjoy your later years comfortably.
Deciding Which Stocks to Sell
Active investors often face the dilemma of whether to sell winning or losing stocks. Generally, it’s advisable to first sell underperforming stocks to utilize capital loss tax deductions. If more funds are needed, then you may need to liquidate some of your winners, ideally in a way that balances out capital gains with losses.
Remember, selling stocks is an integral part of realizing your investment goals. It’s about finding the right balance between growing your wealth and enjoying life’s pleasures.
Diversifying Into Private Growth Companies
Another interesting investment avenue is allocating funds to private growth companies in sectors like AI, fintech, and proptech. Platforms like Fundrise have made venture capital more accessible, allowing investors to diversify into these cutting-edge fields with significantly lower entry barriers compared to traditional venture capital funds.
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