The Biggest Mistake People Make When Opening an Investment Account
When opening an investment account like a Traditional or Roth IRA, there is a common mistake that many people make that could cost them thousands of dollars in the long run.
In this article, we’ll explain this investing mistake and what you can do to avoid it.
Avoid this mistake with your traditional or Roth IRA
Many people make a simple mistake when funding a brokerage account: they leave their funds in a temporary settlement account without actually taking the extra step of investing the money.
When you open an account, it should follow a predictable pattern: You open the account, you finance the account then you choose your investments.
That’s it last step to the right in this graphic of Fidelity Investments that people forget!
Understand the problem
When you open a brokerage account, the money you transfer to the account “goes live” in a settlement fund until you choose to put it into a particular investment.
But what if you never select any investment?
The answer is that your money just sits there earning paltry interest in a settlement fund when it might instead make more money in the stock market.
This is the very mistake that too many people make. They transfer money to their newly opened brokerage account and think they have done all they needed to do.
In reality, this settlement account where your money at the brokerage house resides is only meant to be a pit stop.
You have to choose a final destination for your money – and money expert Clark Howard has a place he likes you to start.
“Even if that’s not your thing, I like that you put the money in a target date retirement fund closest to the year you want to retire. This way your money is invested from the start. If you later want to do something more exotic with the way your money is invested, then you can do it.
Editor’s Note: For a full understanding of how target date retirement funds work, check out this article.
But if you can’t make a selection, it’s a “repeat, lose” type situation. Your money stays there and doesn’t really work for you.
How much of a problem is this?
Here’s an example: let’s say you contributed $ 10,000 to a brokerage account 10 years ago.
Now let’s say the money went into your settlement fund and stayed there, never being invested. Over a 10-year period, this money would only bring in a little more than $ 300. It’s almost nothing!
Now consider the alternative: You took that same hypothetical $ 10,000, sent it to your brokerage, and actually picked an investment like an S&P 500 index for the money.
Based on research by Charles Schwab, this money would be worth somewhere between $ 16,000 and $ 30,000 today.
So don’t make the rookie mistake of funding a traditional or Roth IRA or any other investment account, but then not select a specific investment for the money to flow.
How do you know if you are making this simple mistake?
Now that you know what is the # 1 mistake people make when opening an investment account, it’s time to verify that you aren’t.
To do this, simply log into your online brokerage account and check the dashboard for something that looks like this …
This particular example is from a Vanguard brokerage account. As you can see, there is around $ 20 in a settlement fund earning next to nothing that could be invested.
OK, so $ 20 might not be a big deal. But for you, it could be a problem of thousands of dollars sitting there!
If you are not comfortable verifying your account online, you can always call your brokerage firm and ask if you have any money in a settlement fund.
Here is some contact information to get you started:
Opening an investment account but not selecting investments is a great danger for new investors. But you can avoid this common pitfall by taking a moment to verify that your money is not in a settlement fund.
If you need help choosing low cost bang for your buck investments in a settlement fund, check out our recommendations here.