Investing 101

Pretty much never. If you don’t have “market edge” and the market goes up about 8% a year, just let things cook as long as you can. Steak can’t be “too” tender. But when you do sell, think about why you are selling and/or other alternatives.

Buying a car? If you think you need to sell stocks to buy it, think again. If you have $25,000 in stocks, and you want to buy a used Taurus for ten grand, what about borrowing $10,000 from… yourself? Schwab and others offer margin services and usually borrowing from yourself is cheaper than the kindly loving auto dealer slipping you paperwork for loan forms.

You have to be disciplined to pay down that $10,000 over time – and realize that if the market got absolutely crushed and your $25,000 in stocks became worth less than $20,000 you’d be 50% margined and likely trigger a “forced sell” signal with most brokerages. This is particularly ugly because stocks you liked at $50 a share are now $40 a share – and you have to sell them. Sucks. But if you can take some risk and have liquidity to pay down the loan fast-ish, then the risk is often worth it.

Think about what happens if you sell $10,000 to buy the car outright. Well, in reality, you likely have to sell much more than $10,000 to buy it – let’s say you bought stocks well and over the last 8 years they have appreciated well (or they were gifted to you and you have a $0 cost basis for tax purposes). Let’s make up the notion that you have a $4,000 cost basis on the $10,000 you want to sell and that it’s all taxed at long term gain if you sell. That means you would show a gain of $6,000 and at 30% long term rates for state and federal taxes, you pay $1,800 to the government for the privilege. So you need to sell closer to $12,000 of your stocks to buy the car outright for $10,000. In addition there is the opportunity cost of your money – you took money out of an appreciating asset to buy one that is worth less the minute you drive it off the lot. Doable but remember… that car didn’t cost you only $10,000.

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