It’s OK To Sell Stocks Once You’ve Made Enough To Buy What You Want

Everybody should have some investments in stocks. Although stocks provide zero utility, some stocks provide dividend income and all stocks have the potential for capital appreciation. Since 1926 the S&P 500 has returned about 10% on average a year.

Further, at some point in your life you should sell some stocks to buy what you want. Once you’ve accumulated or made enough, go out and enjoy some of your gains. Otherwise, there’s really no point investing in stocks.

Unlike real estate, you can’t sleep in your stocks. Unlike fine art, you can’t hang your stocks on your wall to enjoy. And unlike fine wine, you can’t drink your stocks.

In other words, stocks are useless if you don’t sell them on occasion. Stocks are a means to an end.

The Main Things To Buy After Selling Stocks

There are many reasons why you’d want to sell stocks. But first, let’s eliminate as a reason of believing stocks are overvalued and you expect the stock market to correct. Timing the stock market is difficult.

Below is a chart that shows the annual returns and intra-year declines of the S&P 500 since 1980. Despite average intra-year drops of 14 percent, annual returns were positive in 32 of 42 years, or 76% of the years.

Let’s talk about some actual things you might want to buy with your stock proceeds. As an investor, you’re way ahead of those who just spend all their money now!

1) Sell stocks to buy a car

If you’ve been investing in stocks for a number of years, and they have appreciated to where you can purchase a car in cash, then selling stocks might not be a bad idea. The key is to follow, or closely follow, my 1/10th rule for car buying.

If you don’t, you will probably regret buying an overpriced car as the stock market tends to go higher annually ~76% of the time. Selling stocks to pay for a car is psychologically more difficult because you’re trading a potential wealth builder for a guaranteed wealth destroyer.

But if you need a car for work or to transport your kids to school, then buying a car is a necessity. Just try to pay as little as possible for the safest car you can find.

Example of selling stocks to buy a car

Let’s say you want to buy a $38,000 car and the lease or car purchase payment is $400 a month. The goal is to have at least $38,000 in stock investments in your taxable portfolio. But the preference is to have at least $38,000 in stock gains. From there, you can decide to sell stock to pay for the car however way you want.

I’d rather pay cash for a car with my capital gains. However, leasing a car or borrowing to buy the car so you don’t tie up as much capital may be beneficial. But if you go the monthly payments route, you should be able to pay for the car via your monthly cash flow.

The act of selling stocks to pay cash for a car still gives me the shudders. I drove a sub $9,000 car from 2003 – 2017 because I couldn’t stand missing out on potential stock market and real estate market gains.

2) Selling stocks to pay for college tuition

Hopefully, parents start saving for college as soon as their baby is born. One of the most tax-efficient ways to do so is by investing in a 529 plan. After-tax money goes in, but the money gets to compound tax-free and withdrawals are tax-free to pay for qualified educational expenses.

Another strategy is to pay for college with a Roth IRA. The tax implications are similar, but there are fewer restrictions on what you can spend the Roth IRA money on.

Selling stocks and bonds, usually in the form of a target date index fund, to pay for college is easy. For a 529 plan, the funds must be used for college and up to $10,000 a year for private grade school.

In addition, the value of a college degree should equal to at least the total tuition cost you pay to get a degree. Otherwise, you shouldn’t be willing to pay it if it won’t boost your future income generation power.

If you sell stocks to pay for college, you’re actually just shifting assets in your net worth.

Might be hard to use all the 529 funds to pay for college

After potentially 18 or more years of saving and investing for your child’s college education, you might not want to use all the funds. I imagine a scenario where I try to convince my children to go to a cheaper public university or a university that offers more scholarships to save money, even if the ranking isn’t as high.

This way, leftover 529 funds can be rolled into a Roth IRA to be used for whatever. Alternatively, the 529 plan’s beneficiary can be changed to someone else’s name, including your grandchild’s name. Wouldn’t that be nice?

3) Selling stocks to buy a house

Buying a house is one of the main reasons to sell stocks. If you plan to live somewhere for at least five years, it’s best to get neutral real estate by buying your primary residence.

Historically, real estate has appreciated at the rate of inflation plus 1-2% a year. Therefore, if you sell stocks to buy a house, you’re trading a more volatile asset with a higher historical return for a less volatile asset with a lower historical return.

However, depending on the downpayment amount, the returns from real estate could be greater than stocks. And if you can enjoy your investment in the meantime, then what a great combination.

Buying a dream house with stocks

A dream home came back on the market a year later asking 7% less. I would have bought the home for its asking price last year if I had the money. But I didn’t as the bear market reduced the value of my stock and bond holdings.

Due to my negotiating skills and willingness to let the selling agent represent me, I’m able to purchase the home for 14% less than last year’s asking price. As a result, I’m highly tempted.

I wasn’t expecting to buy another forever home three years after purchasing my existing forever home in June 2020. But here we are. The only problem is this home requires me to sell a lot stock to pay cash.

Fortunately, the stock market has rebounded in 2023, so I actually don’t mind selling a lot of stock at current valuations. I could sell some losers to offset capital gains.

4) Selling stocks to pay for emergency expenses

Hopefully, everyone has at least six months of living expenses saved up at all times. If so, most emergency expenses can be paid for using the emergency fund plus monthly cash flow.

However, if the emergency expense costs more than your emergency fund’s value, then selling stocks to pay for the shortfall makes sense.

Although there is no appreciation potential paying for an emergency expense, paying for an emergency is a necessity. The money spent could save a life, pay for a deductible for insurance coverage to pay out, or prevent things from getting worse.

5) Selling stocks to fund your retirement

Selling stocks to pay for retirement is usually the main reason why we are encouraged to invest in stocks in the first place. However, after a lifetime of investing in stocks, it’s often difficult to decumulate. Instead, it feels much better to invest in dividend-paying stocks and try to live off the dividend instead of the principal.

In retirement, we will hopefully receive income in the form of Social Security benefits, pension, passive investment income, and/or distributions from our tax-advantaged accounts. The more income sources for retirement the better.

However, if we only have Social Security benefits and our 401(k) or IRA to pay for retirement, then selling stocks may be the only way. You can’t take your stocks with you, so you might as well sell stocks to fund the remaining years of your life.

The tax consequences of selling stocks in retirement can be significant. Hence, it’s best to have a combination of a Roth IRA and 401(k), if available. Roth IRAs do not require withdrawals until after the death of the owner; however, beneficiaries of a Roth IRA are subject to the RMD rules. 

Can be difficult to sell stock if you retire early

When I left work in 2012 I prepared to sell some stocks to pay for retirement. However, I couldn’t because I was only 34. Selling stock then felt like I was short-changing my future wealth. We were only a couple of years out of the global financial crisis and I felt there was a lot of upside.

Instead of selling stocks, I ended up making supplemental income doing things I was curious about or enjoyed, e.g. consulting for startups, writing online. The trend continues today.

But I have to imagine that once we’re past 65 years old, selling stocks to pay for retirement is easier. We are more aware of our mortality as we age. Further, by then, it’s easier to model our financial needs given we have fewer years to plan ahead.

Sell The Losers Or The Winners?

If you are an active investor, one dilemma you’ll find when selling stocks to buy something is which stocks to sell first?

In general, winners tend to keep on winning while losers tend to keep on losing. Turnaround stories are rare, but they do happen. Although, all companies have life cycles.

Given losers tend to keep on losing, it may be best to sell your losers first. This way, you will not have to pay capital gains tax. Instead, you’ll get to deduct up to $3,000 in investments losses for the year. Or you can deduct up to the total stock loss if you have an equal capital gain that year. Check the latest tax loss rules.

If the sale of your losers can’t cover what you want to buy, then you’ll have to sell some winners. Ideally, you sell enough winners with enough capital gains to offset your capital losses. This way, you’ll pay zero or minimal capital gains tax.

If you’re talking about selling stock in an index fund, like the S&P 500, then you have no other choice. Whenever you sell stock in the S&P 500 to buy something, accept that ~76% of the time you will miss out on future gains over the following 12 months.

This potential opportunity cost is one of the main reasons why prodigious investors find it so difficult to ever sell.

Plan As Far Ahead As Possible

Risk control and tax liability management are the two main reasons to plan ahead before selling stocks to pay for something.

The farther in the future your expense, such as 18 years for your newborn’s college tuition, the more aggressively you can invest in stocks. The closer your child gets to college age, the more the target date fund will shift its asset allocation towards bonds and away from stocks .

As for buying a house, there’s a lot more risk investing your down payment or all-cash payment mostly in stocks. Given the median home price in America is around $420,000, you’ll want at least a $84,000 down payment plus a $42,000 buffer if you are following my 30/30/3-5 home buying guide.

If you invest 100% of the $126,000 in stocks and a 35% bear market hits, you won’t be able to comfortably afford to buy your target $420,000 home anymore. If you want to pay $5 million cash for your dream home and you make less than $1 million a year, then you can’t afford to invest the majority of your dream home fund in stocks.

I wrote a post on how to invest your down payment if you plan to buy a house within various time frames. The closer you are to buying your house, the less your down payment should be invested in stocks.

Occasionally Sell Stocks To Live Your Best Life

In my 20s, I never considered selling stocks to pay for anything. I was committed to saving and investing as much as possible for retirement. After experiencing fake retirement for over eleven years, I’m OK with selling stocks to pay for things. At 46, sadly, my life is half over.

In my opinion, the best way to “decumulate” is to upgrade homes.

I put decumulate in quotes because buying a nice house at a great price can also act as an investment. The money doesn’t just go to zero. On the contrary, the asset shift could appreciate as the home may appreciate over time. But I’m not buying the home to make money. I’m buying the home to upgrade our lifestyle.

There’s really no point saving aggressively and investing wisely if we don’t occasionally take profits and spend.

Once you’re in your 40s and beyond, if your stocks have appreciated to the point it can buy you a dream home, pay for a safe car, or buy whatever your heart desires, I say go for it. You’ve already been investing for 20 plus years.

Replenish Your Stock Exposure, Create New Wealth Goals

Once you sell stocks to buy something, review your new net worth composition. After reviewing your net worth breakdown, create a new net worth goal and composition target.

In my case, if I sell stocks to buy a new house, I will start dollar-cost averaging back into the stock market with my monthly cash flow. My main goal will be to boost my net worth so that my new home becomes less than 20% of my net worth.

And maybe I’ll get lucky with this house purchase. There’s a ~24% chance I could sell stocks before another correction hits. There’s also a chance I buy this house before prices start ticking up when mortgage rates decline again. Or the opposite could happen.

Nobody knows for sure. But what I do know is that life goes on. Delaying gratification by investing should only go so far.

Reader Questions and Suggestions

Do you regularly sell stocks to pay for things? What have you purchased recently with your stock sale proceeds? Do you like to sell your winners first or your losers? What approach do you take to ensure you’re monetizing the value of your stock holdings?

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