I’ve thought about putting the $25,000 in an REIT (real estate investment trust) but I have never done investment before and have no idea how it’s run. I am guessing someone else would manage the REIT for me and I just let it passively pay me something like $1-2k a year in dividends?
The talk about mutual funds, index funds, etc. all goes way over my head.
In investment terms, $25k isn’t a lot. But I feel I ought to use it for something. It’s too big to let sit in savings, but too small to really do anything major like buy a house or anything.
You always have to look at the costs that will be charged to you. Initially and ongoing. Will the investment returns at least equal these costs? Most importantly, what losses are you liable for? Can your investment go negative and cost you money? Buy a bunch of stock and it can go to zero and you are at zero. But some more complex vehicles can leave you liable to go below zero and have to pay out money. Do not go there!!
I do not know the details of a real estate investment trust. But it sounds like you will own a portion of multiple places where people live. Places where people live are open to bad things happening to those places. What is your liability to bad things happening? Is the trust fully insured against those bad things?
At what level are you buying into the trust? The naked to bad things happening level? Or the upper, protected by you taking the fall, level?
Maybe just buy blue chip, dividend paying stocks like Microsoft. Even if the market takes a big hit. If you can wait out the hit, sitting on a stock that will continue sales and profit through and after, then your 25K may weather the up and down relatively well.
But I am no expert at all. I slightly more than doubled my small amount of money once many years ago on a sell at 10% rise with moderately informed method over a few years. But that is all out the window now. I have 8K sitting stagnant for years now.
I think it’s worth it to do a bit of reading up on investing, unless $25k is chump change to you.
Typically, an S&P 500 fund is recommended for people that don’t want to learn anything about investing - just park the money and let it grow. This is Warren Buffet’s advice for the average person.
REITs are for people that want dividend income to replace earned income, like retirees; there are various types specializing in apartments (Realty Income - ticker O), malls and retail (Simon Property Group - SPG), nursing homes (Welltower - WELL), and industry (STAG Industrial - STAG). There are also mREITs which are tied to mortgages, and considered more volatile. Be aware that REIT earnings are taxed like Earned Income (your current tax rate), not Dividend Income (15% after a year).
And so on. It mostly depends on your time window and risk tolerance. Personally, I’d put the money into Microsoft and/or Apple and let it grow if you don’t need the money for years. The 5-year returns on those are around 400% and that’s unlikely to change any time soon, imo.
When I first started thinking about investing, everything was way over my head, too. The best thing I ever did was to just go ahead and open a brokerage account and jump in, totally ignorant. I learned on the fly and by buying “investing for dummies” books. I bought some conservative index funds, and I bought REITs. Today’s brokerage websites make it easy, and you can always go to Investopedia to quickly learn investing terms.
I own a REIT or two; they’re nice for paying dividends. I picked them by just googling “best REITs” and then using the research tool on the Schwab website to see which were riskier and which were safer. REITs don’t typically soar dramatically in value like stocks or funds, but then again, they don’t plunge dramatically, either, unless you picked a risky, volatile one.
My favorite REIT at the moment is UBA, which has steadily paid 5% since I bought it.
The Fed has signaled that they may be ready to raise interest rates, so now is probably not a good time to open a position in a REIT. Though it’s a fool’s errand to call the top of any market, real-estate is sky-high and it’s hard to see very much upside in the short term.
Although the value of REITs mostly comes from dividends, this shouldn’t be taken as synonymous with stability. The dividend can readily rise and fall with their revenue, sometimes dramatically, and your capital can take a big hit when it falls.
Not sure why the topic of management is at the forefront of your mind, but they’re generally not boutique products with your own personal wealth manager. You go online to your brokerage account and buy some shares like the rest of us mooks, and they deposit dividends every quarter.
I’ve done well with REITs in the past when conditions lined up with my goals, but they’re definitely not a fire-and-forget solution.
A better (related) question is “how much risk are you willing to take” and “what is the timeframe over which you are looking to invest”. Generally speaking, the bigger the risk, the bigger the potential returns. But also the bigger the potential losses. A no-load index fund tied to the S&P being a decent low-risk long term balance.
Also, is the OP looking to “generate passive income” or increase value? There’s a difference. Generate income implies something like a dividend stock or an annuity that pays out money over a period of time (some small fraction of $25 k).
That’s a good question. For someone’s first investment (which is apparently what this is for the OP), I think an S&P 500 or total stock market index fund may be a better choice. Or even a three-fund portfolio; one third total domestic stock market index fund, one third total international index fund and one third bond market index fund. And then ignore any fluctuations over the short term, meaning don’t panic if there is a drop (which seems inevitable).
Another idea; move $6,000 each year to a Roth IRA.
This is not good advice. First, it’s not likely possible - the OP describes non-qualified money that would not be eligible for a 401k rollover. Secondly, most employer-sponsored plans are full of fees.
For the new investor who doesn’t know the difference between a mutual fund, REIT or index fund, my advice is to go to the nearest Fidelity office and ask to speak to an advisor. Fidelity fees are minuscule, and they offer a massive assortment of investment choices. At the very least, you’ll have your first conversation with an advisor to see if it’s a possible business relationship. They’ll likely suggest a basic brokerage account where you plop it into an S&P 500 fund or, if you’re dead set on earning income, the Fidelity Capital and Income Fund.
Typically, REITs are very high on the fee scale. There are mutual funds and other vehicles that are invested in many REITs that don’t have those fees (but they’re baked in there somewhere).
Ultimately, don’t invest in something you don’t understand, and don’t work with someone who won’t explain things to you until you do.
Before you even think about investing, answer these two questions -
Do you carry a credit card balance? If yes, then use the money to pay off the credit card balance first. That would effectively give you a return on the money equal to the APR you are paying on the balance. If the answer is no, you don’t carry a credit card balance, then proceed to question 2.
Do you have emergency savings to pay 3-6 months of living expenses? If yes, then proceed to thinking about investments. If no, then stick the money in a money market savings account and designate it as emergency savings.
On the other hand, the OP could increase their 401(k) contributions and use this money to replace the lower paycheck. (Assuming, of course, that they’re not already maxing out their 401(k) contributions.)
That’s a way to go. They could also put $12,000 right now into a Roth IRA, put the other $13,000 into a non-qualified account, and move $6000 over each year. That’s likely what I’d recommend, assuming the OP isn’t over the income limits for a Roth and isn’t already contributing to one.
Before moving a lot of money into a Roth IRA, a person needs to have a good think about whether they expect their tax bracket in retirement to be higher or lower than their current one. In 20 years, is that $25K of capital going to grow enough where the tax consequences really matter? It depends.
A Roth IRA isn’t automatically the best solution for everyone. For example, I expect to have my house paid off and kids through college by the time I enter retirement. I’ll need very little income to live, so my income tax will be a lot lower than now. So I’d effectively be burning money if I opened a Roth IRA, because I’d be effectively choosing a higher tax rate.
I think a Roth is mainly beneficial for young, disciplined savers whose investments have a lot of room to grow, or older wealthier people who obsessively prioritize tax avoidance (maybe at the expense of the bigger picture).