Art by Jonan Everett
Investing in the stock market is one of the best ways to build long-term wealth. When you invest, your money starts making money (hello, interest!) and you outpace inflation. But just because you know you need to invest doesn’t mean you know everything about how to do it. Investing isn't difficult, but it’s easy to make a mistake. Here are three of the most common investing mistakes that people make and how you can avoid them:
- Leaving all or most of your investments in a money market fund
- Not learning what fees you may have to pay
- Not organizing accounts from past jobs
Investing Mistake #1: Leaving Too Much in a Money Market Fund
A money market fund is a common investment that is low risk and low return. It’s a fine place to store some money, especially if you want easy access to it. But since the return rates are modest, this sort of fund is not a good place to leave money for the long term. You won’t earn enough on it to justify its being there instead of in a more moderate risk investment.
Investing Mistake #2: Not Knowing What Your Account Fees Are
Fees can make or break your investment portfolio. The amount you’ll pay varies and depends on the type of asset you buy, as well as how long you hold onto the asset and who manages your portfolio. It’s crucial for you to know how much you’re paying and to try to keep the amount as low as possible, since fees can negatively affect your investments over time.
For example, if you contribute $6,000 a year to your investment accounts and earn seven percent interest for 30 years, you’ll have $566,764.72. But if you’re paying two percent in fees each year, you’re actually earning only five percent in interest. That takes your 30-year projection down to $398,633.09.
With that much money on the line, you need to know your fees. Indexed assets, such as index and exchange-traded funds (or ETFs), tend to have lower fees than accounts with specific types of mutual funds, which are actively managed and therefore cost more. There can also be fees for actions you take surrounding your accounts. For example, you might incur a trade commission fee when you trade stocks. Or you might be charged a brokerage fee to simply maintain your account with a certain firm.
If you have a financial adviser, ask him or her to go over every fee with you.
Make sure you understand how much you’re paying each year and what you’re paying for.
Investing Mistake #3: Leaving Accounts From Past Jobs Unorganized
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Most commonly, you move on to a new job, but your investments stay behind. Roughly 12.5 million Americans have workplace-defined plans and change jobs every year, then have to figure out what to do with their account. If you're one of those Americans, you have a few choices. You can either cash it out, roll it into a new retirement account, or leave it as is.
The best option for you will depend on your financial situation, but the one thing you don’t want to do is leave the money unorganized. You need to know exactly what you want to do with your old workplace account and how that money factors into your larger financial picture. Even if you choose to leave the money where it is (for instance, if you’re close to retirement age), that should be a conscious decision.
Leaving money unorganized and unaccounted for is an investing mistake that can cost you big time. You can end up thinking you’re behind in savings if you don’t account for the money. Or you may miss out on rolling that money into a higher-earning account.
To get organized as an investor, the first thing to do is to make sure that you know where all your accounts are and how much money is in each one. Make a list of all your accounts and their totals. Be sure to include any old workplace accounts.
Next, check those fees and choose funds that have low ones. Also make sure to regularly check in with either your financial adviser or brokerage firm to stay on top of the charges. Finally, decided which accounts you want to be regularly contributing to and set up automatic deductions to them.
Avoid these common investing mistakes and you’ll be well on your way to a solid portfolio.