The Moneyist: My cousin has $8,000 in credit-card debt with 20% APR. She has $5,000 in stocks. Should she sell them to pay the credit card?

I suggested that she sell the stocks and pay off $5,000 on the credit card, because it is very unlikely that the stocks she holds will appreciate by more than 20% over the next year. Does this sound reasonable?

I didn’t want to force the cousin to sell the stocks, so I posed the question: “Do you think that your stocks have the chance to appreciate more than 20% by next year?” She answered yes.

I know that anything is possible with any stock, but how do I tell her that she is most likely wrong?

Confused

Dear Confused,

You may both be right.

Stocks generally appreciate at an average of 10% a year, but that figure does not account for the wild fluctuations during each 12-month period. As this report by NerdWallet pointed out: “Between 1926 and 2022, returns were in that ‘average’ band of 8% to 12% only seven times. The rest of the time they were much lower or, usually, much higher. Volatility is the state of play in the stock market. But even when the market is volatile, returns tend to be positive in a given year. Of course, it doesn’t rise every year, but over time the market has gone up in about 70% of years.”

Speaking of 70%, MarketWatch on Tuesday published this analysis of certain stocks that are expected to rise by at least that much over the next year. Philip van Doorn looked beyond the benchmark S&P 500 SPX, +1.61% to the Russell 1000 Index RUI, +1.72%, which represents about 90% of the U.S. public equity market. For the Russell component list, he used the holdings of the iShares Russell 1000 ETF IWB, +1.73%.  “A sliding stock market means many companies are on sale, which spells opportunity for investors with investment horizons of several years,” he wrote.

But there are many caveats. Firstly and most importantly, expectations — as your mother might have told you — can often lead to disappointment. And it’s highly unlikely that your cousin will have cherry 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. In fact, van Doorn also pointed out 10 stocks that have fallen by at least 20% this year, showing the wildly unpredictable nature of the stock market. They are quite a diverse group.

That’s not to say your cousin is in a pickle. She is, and in addition to figuring out how to get out of it, she also needs to take a long, hard look at how she got herself into this mess in the first place. Otherwise, we will all be having the same conversation after she — hopefully — pays off this debt. Paying off $410 per month with a 10% interest rate would take your cousin approximately two years to clear her credit-card debt. If possible, I suggest she keep her stocks where they are. If she doesn’t touch them, they will benefit from 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; don’t go to restaurants; shop in bulk; and wherever possible, buy generic brands, which are usually cheaper even if some consumers don’t like how they taste. (Being picky is a luxury your cousin can ill-afford.) You can help her along the way, keeping her accountable. If necessary, buy her a whiteboard to help track her progress, with small rewards — say, a trip to the movies — along the way.

Your cousin has racked up $8,000 in credit-card debt. That’s a lot of money, especially if she faces an uphill battle paying it off. But she can take heart in the knowledge that it could always be worse.

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