How can my wife and I maximize our financial situation?

We are newly minted healthcare professionals with a combined gross income of $400,000. We are in the process of paying back a substantial student loan balance (~$260,000). We refinanced our loans to 1.95% over 5 years (~$4,000/month), so it's a relatively aggressive strategy to pay down our debt for the lowest interest rate we could find. We don't have any outstanding debt such as a mortgage, car, or credit card debt. However, we live in an expensive metropolitan city so our rent is high compared to the national average.

Her employer offers a 401(k) and a pension, while my employer offers a 403(b), a 457(b), and a pension. We've maxed out our retirement plans and are trying to save an additional $2,500/month. Also, our monthly savings will dramatically increase after we've paid down our student loans in 5 years. We could probably stand to be more aggressive with our after tax savings, but we like to travel.

We're not entirely sure we are ready to pull the trigger on buying a house in this market because housing prices are severely inflated. Plus, we're just not sold on the economics of purchasing a single family unit.

My question is, what investment strategies should we consider after maxing out our retirement contributions and the monthly savings we're currently doing? We've been using robo-advisors (e.g., Wealthfront) while we try to figure our next steps. Does anyone have any suggestions?

Financial Planning, Investing, Real Estate
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January 2017

I would recommend avoiding the use of robo-advisors to create your long-term asset allocation. As a Chartered Financial Analyst (CFA) and a CPA, I have learned over the years that the metrics upon which traditional asset allocation methods and quant-based models used by robo's, which generally rely on backward-looking measures of 'correlation' are fatally flawed. As I'm sure you're well aware, rising geopolitical risk across the globe, the trend toward 'anti-globalization,' and unprecedented leverage across the international monetary system create a wide distribution of potential macroeconomic outcomes over the coming year (and beyond). Investors are only in the early, early stages of catching on. Volatility can be traded in the financial markets (as can just about anything), and currently sits at astonishing low levels as consumer confidence in the US has surged following Trump's election and subsequent announcement for pro-growth fiscal policy, defined by individual and corporate tax cuts and deregulation. This confidence has already begun to wane, and should only continue to do so in the coming months - in other words, the 'hope trade' is overdone.

So how would an individual investor take advantage of such an environment? Using history a guide, it's useful to note that insanity can continue for an extended period of time, continuing to drive rallying equity markets - but once confidence is lost, you don't get it back. You just don't. Markets tank, and not just the equity markets. You see, here's where the correlation measure gets investors in trouble: during episodes of financial panic, historical correlations break down entirely, and asset classes that historically exhibited low correlation (e.g. Stocks vs. bonds vs. commodities) suddenly move decisively in the same direction ... down, fast. For example, in 2008, you couldn't even find a buyer for investment grade corporate bonds for a sustained period of time. Even Treasuries were forced to be sold at fire-sale prices - any time debt overwhelms real economic growth for a sustained period of time, you may hear things like "it's just a liquidity problem." "Liquidity problems are virtually synonymous  with insolvency. 

Episodes of extreme financial panic happen roughly once a century, and curiously they're always driven by borrowings to fund over-consumption to the nth degree. This simply means we're overdue for the next financial 'breakout' - which could happen in 2017, 2018, only time will tell. But one thing is certain it WILL happen, it's simply a matter of WHEN. 

You can capitalize on this by buying shares in the various long volatility ETFs. During the Crisis of 08/09, when equities fell 40%, the volatility index surged some 300%+. So you needn't own a TON of long volatility positions to reap large profits from a coming uptick in recognized volatility in the global financial markets -- if you do, you may reap handsome rewards. But if you're more risk-averse, you can buy, say, 10% of the portfolio in long volatility positions - while holding a significant positions in domestic SPDRs (I recommend the Biotech SPDR, Healthcare, and Technology, and strongly urge you to avoid Financial Services - the derivatives risk inside the world's 12 largest banks, or the 'weapons of mass destruction,' as coined by Warren Buffet, are inconceivable. Derivative exposures alone could drive a collapse in the entire monetary system.

Stay away from emerging markets, whose debt burdens denominated in a strengthening USD and weakening currencies are crippling the prospects for economic growth. Avoid China altogether - the country is going broke, and this is second grade math. At the end of 2015 it had $4 trillion in reserves. At the end of 2016, this fell to $3 trillion, by and large due to capital flight, legal and illegal. Of the $3 trillion the country currently has, $1 trillion is tied up in illiquid investments such as hedge funds by the banks. Another trillion is borrowed funds. Now, the country is burning through $80 billion yuan/month, meaning, as the math simply illustrates, the country will be broke by the end of 2017. Major restructuring, and bailout by global lenders (likely to drive contagion, particularly into Europe and Japan) will be required. 

When investor sentiment reverses, the shift typically happens abruptly and can cause investors like yourselves to lose much of your savings, including those in your 401(K)s, 403(b)s and 457(b)s -and  I wouldn't count on your pension - the US (and global) pension funds face a crisis that can only be fixed in one of two ways: (i) bailout by the government, through the creation of ever more new money (from thin air), handed to the pension funds to pay out retiree benefits, but by the time you'll be eligible to receive such benefits inflation will act as a hidden tax, making the same, dollar-denominated promised benefit payments worth far less from a purchasing power perspective; or (ii) the pension funds will simply go broke, and default on their promises. In any case, I'd be remiss if I didn't advise you to rely on non-pension sources of retirement income. In your other accounts, I recommend only holding exposure to domestic (U.S.) equities, and only through the NASDAQ (NOT the S&P 500, because the Nasdaq does not include Financials). This can be done by buying QQQ. You can hedge your risk of global catastrophe with long volatility positions in a selection of ETFs or ETNs, which can be found here: http://etfdb.com/etfdb-category/volatility/. I recommend VIIZ. Don't fall into the investor's trap, saying, well, that hasn't done so well lately. Well yes, that's precisely why it's cheap, and what makes it attractive. As Buffet once said, do you buy a more expensive house rather than a comparable house that's recently declined in value, simply because it's gone up in price? Of course not, this thinking is backwards, and should be kept in mind when investing in the stock markets.

Hope this helps. Please touch base if you would like further financial advise, my contact information (including email, phone) should be listed along with my profile page.

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