Avoid These 5 Common Money Mistakes With Your Brokerage Account

These are 5 common mistakes people make when they look to invest their money in a brokerage account

Navigating the world of brokerage accounts (a brokerage account is an investment account held at a licensed brokerage firm- think Fidelity, Vanguard, Charles Schwab, or others) as a way to invest your money can be both exciting and daunting, especially when it comes to funding and investing the money in your account.

While investing is a great way to grow your wealth, it's essential to steer clear of some common pitfalls that can chip away at your hard-earned money.

In this article, we'll shed light on five common mistakes a lot of people make and how to avoid them. So, grab your favorite cup of coffee and let's dive right in!

Ignoring Hidden Fees:

When it comes to brokerage accounts, it's not just the upfront fees that matter. Hidden fees can stealthily erode your gains over time.

Many brokerage platforms may charge account maintenance fees, transaction fees, or even fees for inactivity. These fees might seem small at first glance, but they can accumulate over time.

How to avoid it: Thoroughly review the fee schedule of your chosen brokerage platform before signing up (or now that you know!).

Look for fee-free or low-fee options that align with your investment goals and compare different platforms to find the one that offers transparent and reasonable fee structures. Here is a helpful comparison site.

Falling for High Fee Mutual Funds:

Investing in mutual funds can be a smart move as they offer focused investing or potentially more diversification without having to own a bunch of different individual stocks (for example).

That said, not all funds are created equal.

High fee mutual funds can eat into your returns significantly over time. These funds charge higher management fees, reducing the amount of money that actually goes toward your investments.

How to avoid it: Prioritize low-cost index funds or exchange-traded funds (ETFs) that track the performance of a specific market index when investing in them (especially if you are investing for the long term).

These funds tend to have lower management fees and can provide solid long-term returns.

Not Knowing What Your Funds Are Holding:

Investing in a mutual fund or ETF without understanding what it holds can be a risky move. Some funds may have holdings that don't align with your values or investment objectives.

How to avoid it: Always review the fund's prospectus and holdings before investing (there is also usually a quick tab online called “top fund holdings” where you can check this out). Understand the assets it holds, its investment strategy, and any potential risks.

Choose funds that align with your financial goals and risk tolerance.

Overlooking Expense Ratios:

An expense ratio is the annual fee charged by mutual funds or ETFs to cover operating expenses. A higher expense ratio can impact your overall returns, as it reduces the amount of money invested in the market.

How to avoid it: Look for funds with lower expense ratios. As mentioned earlier, index funds and ETFs are generally known for having lower expense ratios compared to actively managed funds.

Every time you see the work "expense ratio” think “fee,” and immediately take some caution before committing to it.

Neglecting Tax Implications:

When you invest, it's crucial to consider the potential tax implications of your investment decisions. Capital gains taxes can eat into your profits, impacting your overall returns. Short term gains (if holding an investment for less than a year) are even worse as you get taxed at a regular income rate.

How to avoid it: Be mindful of the tax implications of buying and selling investments. Consider tax-efficient investment strategies, such as holding onto investments for the long term or utilizing tax-advantaged accounts like IRAs (we have more on how to set your kids up using a 529 plan / IRA here - you can skip the 529 element and go right to a Roth IRA as an adult).

Final Thoughts…

Congratulations, you've taken a big step towards becoming a more informed investor!

By avoiding these common money mistakes when funding your brokerage account, you're on the path to building a more secure financial future for you and your family.

Remember, investing is a journey, and with careful attention to fees, fund choices, and tax implications, you'll be better positioned to make the most of your hard-earned money.

Happy investing, and may your financial goals be within reach!