Author Topic: Lots of questions: taxable account, house, graduate school, REITs, etc  (Read 2676 times)

El Gringo

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Hi guys.  I have a number of questions regarding next steps for where to put my money. I'd love to hear people's thoughts. Here's my situation:

-26 years old, single, salary ~$41,000
-Cash: $19,200
-Total retirement: $25,775
    -401k: $17,244 (currently contributing 7% and getting 1:1 match at 6%). 100% invested in an S&P500 index fund because all the options      in my plan have ridiculous expenses. The S&P500 fund is cheapest at around .8% fee.
    -IRA: $8,529 (maxed out 2012 at $5k, plan to max 2013 at $5.5k). My money is split between five Vanguard ETFs: Extended Market, Total International, US Small Cap, All-World ex-US Small Cap, and Emerging Market)
-Student debt: $8,752 (split between three loans, but average is around 6% interest)

Question 1: I was thinking of adding a REIT to my IRA, but I don't have a strong understanding of REITs. Being that interests rate are going to eventually be rising, this will hurt REITs, right? Would it be better to wait?

Question 2: I was thinking of buying a frontiers market ETF, because I'm 26 and have plenty of time to hold on and ride out something risky and highly volatile. Thoughts?

Question 3: I'm debating what to do with extra money. What should I do with it? Here are my other financial goals:

   Goal 1: I plan to go back to grad school in the next few years, because there's a ceiling in my industry (international development/international affairs) of how far I can advance without masters degree.  I'm not looking forward to going tens of thousands of dollars into debt. But I pretty much assume I'll have to. But if possible, I'd prefer to try and work and go to school at the same time, to reduce the amount of debt I go into. I could sock money away for this. Being that I plan to do this within the next few years, I would want this money to be safe. I don't have a good grasp on financial aid, as my parents mainly dealt with the financial aid for my undergrad. If I have money saved, will that in any way make it harder to qualify for financial aid?

   Goal 2: I also would love to some day buy a house here in the (expensive) District of Columbia. But on my salary, that seems pretty unattainable. Therefore, I figure, why not consistently put money away in some index funds and watch it grow?

  Goal 3: Pay off my current student loans.

Should I just pay off all my current school debt first? Should I try to tackle all three at once? If I started putting money into index funds for a future down payment on a house, what options would be best for a taxable account? A total market ETF?

Thanks!
« Last Edit: October 17, 2013, 07:46:21 PM by GringoLoco »

seattlecyclone

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Re: Lots of questions: taxable account, house, graduate school, REITs, etc
« Reply #1 on: October 17, 2013, 07:09:11 PM »
1) You need to decide your asset allocation for yourself. Many experts do recommend having some exposure to real estate as part of a diverse portfolio. You may want to look into an REIT ETF (VNQ is a popular one). That way you're investing in multiple REITs all at the same time, so mismanagement of a particular one is unlikely to affect your investment much.

2) If you're planning to hold on to your investment for a long time and are willing to take a risk, go for it! Don't put your whole portfolio in there, but emerging markets are definitely a good thing to add to a long-term portfolio.

3) What to do next? Your student loans aren't that huge. I would recommend getting them paid off by the end of next year no matter what. You may want to prioritize maxing out one or both of your retirement accounts for this year before attacking the loans, but then go all out on debt repayment.

I'm not super well-versed on how financial aid works, but I seem to remember reading something about retirement accounts and equity on your primary residence being exempt from reporting on the FAFSA. So if you put most of your extra cash in the 401(k), IRA, and a potential house purchase, you may be considered to have almost no assets as far as the financial aid office is concerned.

Regarding the master's degree, have you done any estimates on how long it would take you to reach FI without it? If you got it, would you be able to accelerate your retirement plans by more than the amount of time it takes to earn the degree?

El Gringo

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Re: Lots of questions: taxable account, house, graduate school, REITs, etc
« Reply #2 on: October 18, 2013, 10:09:13 AM »
Thanks seattlecyclone. In regards to the masters degree and FI, I haven't sat down and calculated it. For one, it's hard to reach FI anytime soon with a salary in the low to mid 40s. Secondly, even if I reached FI, I enjoy my work (it's interesting and allows me to travel) and would want to spend my free time doing similar stuff anyways - but I'd also particularly like to gain more skills and education so that I am more equipped in my field.

Another question - right now I have all of my IRA funds with Vanguard. They don't have a frontiers market ETF - I was thinking of buying iShares MSCI Frontier 100 Index Fund or possibly Market Vectors Africa Index ETF (working in international development, I'm an Africa optimist and would love to invest specifically in Africa for the very long term). If I purchased non-Vanguard funds, what broker do people recommend? The upside of keeping everything in Vanguard is it would be easy to track my contributions, but it'd a lot more expensive to purchase the non-Vanguard funds. What's a cheaper, better alternative that people recommend? Schwab?

KingCoin

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Re: Lots of questions: taxable account, house, graduate school, REITs, etc
« Reply #3 on: October 18, 2013, 12:46:29 PM »
Why not just buy a broad emerging market index like VWO?

I like the idea of having 2-10% of your assets in emerging markets, but historically it's been a very disappointing asset class, delivering higher volatility and lower returns than developed markets.  Even a place like China, where the economy has been growing like gangbusters, has delivered very poor equity returns. Corruption, poor corporate governance, and high priced-in growth expectations can all mean that high growth doesn't translate to high returns.

Until fairly recently, it was viewed as fait accompli that the third world would eventually close the gap with the first world, but that view is beginning to change.
http://www.nytimes.com/2013/06/23/business/emerging-markets-hitting-a-wall.html?_r=0

beltim

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Re: Lots of questions: taxable account, house, graduate school, REITs, etc
« Reply #4 on: October 18, 2013, 12:49:59 PM »
If you're pursuing a Masters degree in those fields in or around DC, the single biggest change you could make is to find an employer that will pay your tuition.  Those employers definitely exist, and changing could be a huge financial benefit for you.

El Gringo

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Re: Lots of questions: taxable account, house, graduate school, REITs, etc
« Reply #5 on: October 18, 2013, 01:08:19 PM »
KingCoin,

The emerging markets indices like VWO don't really touch the frontier markets too much (like sub-Saharan Africa). In fact, while emerging market indices have significantly disappointed this year, the frontier markets indices have returned a lot better. I'm not interested in chasing past return, though - I'm more interested in just investing long-term in areas that have huge potential for huge growth over the next few decades, and sub-Saharan Africa is one of those places. It also seems away to stay diversified as FM have been pretty uncorrelated with emerging and developed markets. (http://blogs.marketwatch.com/thetell/2013/08/21/why-the-frontier-markets-etf-resisted-the-emerging-markets-exodus/ or http://www.businessinsider.com/frontier-markets-outperforming-emerging-markets-2013-8).  I'd keep my AA in frontier markets to a very small percentage, of course. It interests me and I am passionate in finding ways to invest small amounts of money in places like Africa.

beltim, that certainly would be nice. Unfortunately in the non-profit NGO world, it's pretty hard to find an employer who will pay for your tuition. My current employer provides annual tuition reimbursement to a certain limit (I believe a few thousand dollars. Enough for one to two classes a year).
« Last Edit: October 18, 2013, 01:10:02 PM by GringoLoco »