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.

Check out the Moneyist private Facebook group, where we look for answers to life’s thorniest money issues. Readers write in to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.

The Moneyist regrets he cannot reply to questions individually.

By emailing your questions, you agree to having them published anonymously on MarketWatch. By submitting your story to Dow Jones & Company, the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.

Read more:

‘We believe his ex-wife put her up to this’: My husband’s daughter asked me why I am the beneficiary of her dad’s life insurance instead of her. How do I respond?

‘The graveyard shift is the most understaffed:’ I wait tables on the Las Vegas Strip. Our drunk customers often don’t tip. How can I persuade my boss to add a service charge?

‘It put everyone in a weird position’: Our waitress said a 20% service fee was added to cover benefits and health insurance, but that it was not a tip. Is this normal?