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My cousin has $8,000 in credit card debt with 20% APR. She has $5,000 in stock. Does she have to sell them to pay the credit card?

Dear Quentin,

I helped my cousin organize her finances and I wanted to get your opinion on two questions:

This cousin has $8,000 credit card debt that charges 20% APR while owning about $5,000 in stock (held for over a year, so she would only pay capital gains tax on any profit if it sold).

I suggested she sell the stock and pay $5,000 back on the credit card, because the stock she owns is very unlikely to appreciate more than 20% in the next year. Does that seem reasonable to you?

I didn’t want to force the cousin to sell the stock, so I asked, “Do you think your stock has a chance of appreciating more than 20% by next year?” She answered yes.

I know anything is possible with any action, but how do I tell her she’s probably wrong?


Dear confused,

You might both be right.

Stocks typically appreciate by an average of 10% per year, but this figure does not take into account wild fluctuations in each 12-month period. Like this report from NerdWallet underline“Between 1926 and 2022, returns were only in that ‘average’ range of 8% to 12% seven times. The rest of the time they were much lower or, generally, much higher. Volatility is the state of the stock market. But even when the market is volatile, returns tend to be positive in any given year. Of course, it does not increase every year, but over time the market has increased about 70% of the years. »

Speaking of 70%, MarketWatch on Tuesday released this analysis of some stocks that are expected to rise at least that much over the next year. Philip van Doorn looked beyond the benchmark S&P 500 SPX,
the Russell 1000 Index RUI,
which accounts for approximately 90% of the US stock market. For the list of Russell components, he used the holdings of the iShares Russell 1000 ETF IWB,
“A falling stock market means many companies are for sale, presenting an opportunity for investors with multi-year investment horizons,” he wrote.

It’s highly unlikely that your cousin has picked her stocks in such a way that they will lead her to returns of 20% or more over the next year. She’s not Warren Buffet, after all, and even the “Oracle of Omaha” makes mistakes.

But there are many caveats. First and foremost, expectations – as your mother may have told you – can often lead to disappointment. And it’s highly unlikely that your cousin picked her stocks in such a way that they would lead her to returns of 20% or more over the next year. She’s not Warren Buffet, after all, and even “the Oracle of Omaha” makes mistakes. In fact, van Doorn also pointed to 10 stocks that have fallen at least 20% this year, showing the wildly unpredictable nature of the stock market. It’s a pretty diverse group.

That doesn’t mean your cousin is in trouble. She is, and in addition to figuring out how to get out of it, she also has to consider long and hard how she got herself into this mess in the first place. Otherwise, we’ll all have the same conversation after she – hopefully – pays off that debt. Paying off $410 a month with 10% interest would take your cousin about two years to pay off her credit card debt. If possible, I suggest he keep his stocks where they are. If it doesn’t hit them, they will enjoy compound interest and long-term gains.

The ideal solution: Transfer the balance to a new credit card account with 0% interest for the first 15 or even 21 months, and to pay it off aggressively: Don’t order Starbucks; do not go to a restaurant; buy in bulk; and whenever possible, buy generic brands, which are usually cheaper, even if some consumers don’t like their taste. (Being picky is a luxury your cousin can’t afford.) You can help her along the way, by holding her accountable. If necessary, buy her a whiteboard to help her track her progress, with small rewards — for example, a trip to the movies — along the way.

Your cousin has accumulated $8,000 in credit card debt. That’s a lot of money, especially if she faces an uphill battle to pay it off. But she can take comfort knowing that it could always be worse.

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