Rule of thumb for selling shares

[goldengirlz]

Since we’re bringing back MM posts, I have a question.

I’m buying a new car and planning to put down about 25% of the cost (plus taxes) from my bonus. But I can’t decide if we should finance or pay cash for the rest. To pay cash, I’d need to sell some of my shares.

Some quick back-of-the-envelope math tells me that we’d pay roughly twice as much in interest as we would in capital gains tax. But I’m not sure how to factor in the opportunity cost (i.e. how much growth the stock would have if I held on to it over the next however-many years.)

I know, of course, that there’s no way to time the market over the short term. And over the long-term, it’s usually better to invest than pay off low interest rate debt like a mortgage.

This is a low-stakes question (we’re talking about an extra $1250 over five years) but I’m curious how other people would value it.

[sandandsea]

We sold stock to buy a new car. The stock is at an all time high and even though it’s expected to continue to grow, there is no guarantee. And, we’d still have to pay cap gains tax when we sold it. Finally, we aren’t willing to go into debt for a car as one of our financial principles. We wouldn’t take out a loan to buy more stock to hold long term which is essentially the inverse of your question.

[ohgillian]

For $1250 over 5 years, I'd prefer to just pay cash and not have the hassle of one more payment account to deal with. That's not math though; it's psychological.

I also found when I bought my last car (2018) that they *really* wanted me to finance and by agreeing to finance, I was able to negotiate a bigger discount. So I financed, then paid it off about 4 months later.

I don't know that this is helpful but I guess I like commenting, lol.

[audry80]

We are buying a new car today and sold RSUs to buy it. The stock is at an all time high and we have been burned holding onto RSUs before so we typically sell and re-invest anyway.

[Poppy]

You're going to pay capital gains tax eventually anyway, right?

I would worry more about whether you are over allocated in your company and whether you think you'll earn more on the stock as gains than you'll pay in interest.

[goldengirlz]

Aug 12, 2020 15:17:39 GMT -5 Poppy said:

You're going to pay capital gains tax eventually anyway, right?

I would worry more about whether you are over allocated in your company and whether you think you'll earn more on the stock as gains than you'll pay in interest.

Exactly, that’s the question. I don’t know how to calculate that.

I’m definitely over-indexed on that stock. But it’s tripled in value since I’ve held it. Every time I want to sell, H is like, what other investment do we have that’s performing as well? And I counter, but it’s too much money in one stock! And ‘round and ‘round we go.

[Poppy]

Aug 12, 2020 16:50:28 GMT -5 goldengirlz said:

Aug 12, 2020 15:17:39 GMT -5 Poppy said:

You're going to pay capital gains tax eventually anyway, right?

I would worry more about whether you are over allocated in your company and whether you think you'll earn more on the stock as gains than you'll pay in interest.

Exactly, that’s the question. I don’t know how to calculate that.

I’m definitely over-indexed on that stock. But it’s tripled in value since I’ve held it. Every time I want to sell, H is like, what other investment do we have that’s performing as well? And I counter, but it’s too much money in one stock! And ‘round and ‘round we go.

Well, ok my real answer then is that you should probably diversify (aka sell) a lot of your stock. A rule of thumb I've heard is that you shouldn't have more than 10% of your assets invested in one company, especially the one you work for. I am also in tech and I get the allure. But I would tell myself that if I got a magical pot of money, would I plop it in my company's stock? No. I believe in index investing. That said, there were definitely times I stalled on selling my shares in hopes of making easy money, because I'm human and it was tempting.

However, my dad worked in telecom during that boom/bust and I saw firsthand how prices could skyrocket and collapse alongside with major job instability, and the collateral damage on his mental health was huge. It was rough. So that's always in the back of my mind.


I think the conversation of whether to leverage a loan for index investing depends on one's larger financial picture. For a long term investment where you are not relying on the money, the expected return on the market is likely high enough to justify the risk. Like I still have a mortgage even though I own stocks.

But it's hard to give a specific number. I like to assume historical average minus a buffer, so like 5%ish interest is my threshold. But I also would not take out a loan for millions of dollars just to invest it, kwim? Because losing that money would jeopardize my retirement.

[goldengirlz]

Thanks Poppy that makes sense. I would never take out a loan to invest in more shares, but because these shares are already invested, it felt like a somewhat different question.

We have about 25% of our net worth in my company stock so quite a bit above what’s recommended but not egregious.

[Poppy]

Aug 12, 2020 18:44:07 GMT -5 goldengirlz said:

Thanks Poppy that makes sense. I would never take out a loan to invest in more shares. but because these shares are already invested, it felt like a somewhat different question.

We have about 25% of our net worth in my company stock so quite a bit above what’s recommended but not egregious.

It feels different, but money is fungible. So in a real sense, you are talking about leveraging the loan to "buy" your company stock.

Yes, there are games you can play to reduce taxes (the biggest one is probably to hold the stock so that you pay the long term capital gains rate, but also you can donate your appreciated shares instead of cash, you can pass appreciated stock to your heirs, etc) but there are limits to their effectiveness. Like for the last one you can't spend the money during your lifetime - that's a big limit lol. So I try not to let the tax piece drive the decision. I tried to rebalance out of my company stock on a schedule to help take the emotion out of the process and to keep the balance from getting really out of whack.