180K in debt - should I sell my mutual funds? Forum

[PinkCow]

Not sure if this is the right forum for this, but wondering if I should sell my mutual funds to pay off loans/save for house down payment.

Liabilities:
-About 180K law school/UG debt
-Refinanced through SOFI - variable rate currently 4.065% 5 year loan (4.5 years left)

Assets:
-$6,000 savings
-$20,000 mutual fund
-$3,000 401K
-Dat $160K pre-tax NYC income

Currently:
-Minimum payment $3,600 per month, currently paying about $5,000 per month
-Saving about $1,000 per month, 3% 401K, and $100/month (lol) in personal mutual fund


I live outside of the NYC boroughs which means:
1) No city tax
2) It's possible to purchase a condo/house someday.

My question is whether I should empty the mutual fund straight to SOFI, savings, or something else. I think my mutual funds get well over 4%, but not sure if it's that simple.

[UVAIce]

If you liquidate your mutual fund you're likely to get hit with a tax bomb. Is the fund in a tax advantaged account of some kind? Because if it's not, then you're not doing it right. You are probably better off rolling the mutual fund into a S&P 500 ETF or something boring along those lines. Your administrative costs will be lower and you will essentially get the market rate of return; it's the simplest and best way to essentially get a beta of 1.

I would hold onto the fund as a kind of super rainy day fund - think of something along the lines of losing your job.

What is the max on that variable rate loan? I mean, you're going to be paying more interest in a year or so as rates go up, but probably not "that" much.

Other than that keep doing what you're doing.

[lacrossebrother]

If you liquidate your mutual fund you're likely to get hit with a tax bomb. Is the fund in a tax advantaged account of some kind? Because if it's not, then you're not doing it right. You are probably better off rolling the mutual fund into a S&P 500 ETF or something boring along those lines. Your administrative costs will be lower and you will essentially get the market rate of return; it's the simplest and best way to essentially get a beta of 1.

I would hold onto the fund as a kind of super rainy day fund - think of something along the lines of losing your job.

What is the max on that variable rate loan? I mean, you're going to be paying more interest in a year or so as rates go up, but probably not "that" much.

Other than that keep doing what you're doing.

3% 401k?

[flowering]

.

[Manifest]

What if OP loses his job during the next recession and then has to cash his mutual funds out at 30% loss? I would think rainy day fund should be extremely nonvolatile, whereas mutual fund money should be money that you can afford to invest long term.

I was a financial advisor for 6-7 years before deciding to apply to law school. This is just my personal opinion, but in my experience investors tend to over-prioritize protecting their principle in situations like this. A (potentially) short time horizon isn't a sufficient motivator by itself for me to sacrifice expected ROR in order to preserve principle.

My next question would be: is there something special about that $20k figure, or is it simply the amount you've happened to accumulate at this point?

If $20k is the figure he's decided he needs to have on hand in case of emergency, then yes, I would consider trading upside for certainty. But if it's simply a growing figure that has no designated purpose? Then I'm not willing sacrifice my upside simply because I might be forced to sell at a loss* if something unforeseen were to occur. This is particularly true when your investments are paralleled by a growing liability. If we know that his student loan debt will be growing at X%, rain or shine, then it's important to make sure that he can expect a ROR on his investments that's greater than X% (otherwise the optimal strategy would be to use those available funds to wipe out the debt). I can't tell you how many times I've seen six figures sitting in a checking account while a client's debts are piling up the interest. True emergency funds--meaning money that you really need in case X happens--are a different story. But once an investor has liquid assets (non-IRA/401k assets) and/or available credit** that exceeds his emergency requirements I favor full equity market participation. If you end up selling something after a down week, month or year, so be it. Far more often you'll look back a dozen years from now and be glad your money doubled twice instead of languishing in a bank.

*since we don't know how much of that $20k represents principle and how much represents growth, it's possible he's already doubled his initial outlay and a 30% "loss" from this point forward would still leave him with a profit if and when he sells. But, aside from the tax implications, who cares either way? The goal is to maximize the EV of our personal balance sheet, not to ensure that each and every investment we make can be sold at a profit.

**the availability of credit is very often overlooked when it comes to calculating an appropriate cash reserve. Remember, we want our money to grow for us, and we should only be willing to sacrifice that growth when we absolutely have to. Think of it like buying insurance. Bill Gates would never buy full auto coverage for a Toyota. Why? Because purchasing insurance means trading EV for certainty. Same goes for a cash reserve. If you can open up a $10k line of credit on your home, that's $10k less you should be leaving in cash "for emergencies".

[Big Dog]

$20,000 mutual fund

what is your cost basis?

[Manifest]

Back to the OP:

The academic advice would be to pay the minimum and put the difference into your portfolio. Your student loans represent "good debt" whose interest rate should, in the long run, be exceeded rather substantially by the return in the market. You probably haven't sold the $20k mutual funds to wipe out the loans yet for this reason. By the same logic, why direct more cash flow than required to those loans? The outcome is the same--less money in the asset column and less money in the liability column.

That said, practical financial advice doesn't work that way. One easy question would be--what kind of match does the company 401k offer? You certainly want to take advantage of the full match, that much is a no-brainer. After that, an argument can certainly be made for wiping out your debt quicker than necessary, even at the expense of that spread between the loan interest and expected market returns. There are intangible factors to consider, like the chronic stress of being in debt or the acute stress of an eventual downward spike in the stock market. There is also the uncertainty of the future to consider....

What is more likely to happen to you: (A) a big investment opportunity presents itself in four years in which you can invest $50,000 in a friend's start-up company with huge potential, or (B) an incredible job opportunity presents itself in four years in which you can travel around Africa helping various governments rewrite their constitutions. Obviously a person looking at (A) would benefit from accumulating cash while servicing his debt at a minimum level, while a person more interested in (B) would do well to minimize his liabilities and maximize his flexibility.

These are the kinds of things you should be considering. Figure out what the various paths in front of you are likely to mean to the bottom line, and think about how walking down each of these paths would make your feel. Then decide which package you're most comfortable with.

[jlk411]

Back to the OP:

The academic advice would be to pay the minimum and put the difference into your portfolio. Your student loans represent "good debt" whose interest rate should, in the long run, be exceeded rather substantially by the return in the market. You probably haven't sold the $20k mutual funds to wipe out the loans yet for this reason. By the same logic, why direct more cash flow than required to those loans? The outcome is the same--less money in the asset column and less money in the liability column.

Can someone expound upon the notion of "good debt" and not repaying more than the minimum?

[asdfdfdfadfas]

If you liquidate your mutual fund you're likely to get hit with a tax bomb. Is the fund in a tax advantaged account of some kind? Because if it's not, then you're not doing it right. You are probably better off rolling the mutual fund into a S&P 500 ETF or something boring along those lines. Your administrative costs will be lower and you will essentially get the market rate of return; it's the simplest and best way to essentially get a beta of 1.

I would hold onto the fund as a kind of super rainy day fund - think of something along the lines of losing your job.

What is the max on that variable rate loan? I mean, you're going to be paying more interest in a year or so as rates go up, but probably not "that" much.

Other than that keep doing what you're doing.

Why would anyone choose their investments with the end goal of getting a beta of 1?

Also, do you genuinely believe if IR started to move upward and the economy started to contract, the Fed wouldn't step in?

I guess the answer to my second question would solve your question, OP. I personally believe we are just going to continue to print; which, if that's the case you should keep the mutual fund or just purchase some baby Bs with that money.

[Tiago Splitter]

Whatever you do, stop putting money into after-tax products until you've maxed out your tax advantaged options (IRA, 401k).