Turbo's glow red all the time, I have tons of pics on my computer of turbos (and even bare headers like on our formula car) glowing. I would definately water cool it if I were you. Your going to be heating the coolant the same way it is heated flowing around your combustion chamber! (...completely normal, and is what a healthy engine likes)

Also, be using a very good synthetic oil. I use to swear by Mobile1 but the new synthetic blends specifically made for turbo's, such as Quakerstates Advanced Engine. It's viscosity modifiers are designed away from non-purpose oils not to coke on super heated turbo bearings. Back in the day Corky Bell (Maximum Boost author) would say use a synthetic oil with a small viscosity range (like 20w50), because the modifiers are bad on turbo bearings. Well the new turbo oriented oils provide older tech. 20w50 synthetic oil protection in 10w30 form. That's switching from syrup resistance to apple juice resistance. Ohhh yeah..