A Shocking Common Investing Mistake
In less than a week I heard three people in three different conversations talk about a simple, yet common, investing mistake they had made. It was something I, as someone who has been discussing investing techniques for as long as I could remember, could fathom. It forced me to take a step back and try to gain a perspective of someone who hasn’t been around investment accounts and stocks.
I was at work last week and heard some folks discussing their investment and retirement accounts. Naturally, this made my ears perk up and I must admit, I did some eavesdropping. I don’t necessarily sit right next to the group of individuals having the discussions, so I made an excuse that I needed to fill my water bottle to hear a little more of the discussion. One piece of the conversation that really shocked me, was an individual who is fairly seasoned and very intelligent admitted to one of his largest investment mistakes. He said he had always been told that he needed to contribute to his Roth IRA, so he did. He contributed to his IRA responsibly and maxed it out every year for the past 10 years. 5 years into his contributions, which would roughly to equate to around $25,000 in his account based on the maximum contributions during that timeframe, he had an epiphany. He didn’t mention how he was educated or what made him realize his error, but somehow he realized his contributions and retirement account weren’t doing much. Even though he had contributed to his account for the past five years, like he was told, nobody ever told him that within the account, he would need to purchase something. That’s right. He had ‘invested’ in his retirement by opening and contributing to an investment account, but was never informed that the IRA was simply an investment vehicle and he would need to actually purchase a stock, bond, ETF, mutual fund, etc. in order to get any real return on his money. He had approximately $25,000 sitting in a Roth IRA for the last five years in money market account accruing 0.001% interest. When taking inflation into consideration his retirement account was losing 2-3% each year. As I failed to find an avenue to insert myself into the conversation, I kept to myself and walked back towards my desk still unacknowledged, listening to their conversation. I was dumbfounded and couldn’t believe this individual could have made this mistake. Much to my dismay, another co-worker quickly replied to his story with, “Oh my goodness, I did the exact same thing.” At that point, it got me thinking, maybe this wasn’t as common knowledge as I had thought it was.
Fast forward three days after this conversation, I was surfing Instagram trying to find some financial posts that would catch my attention or advice I could provide to users – shameless plug to follow me on Instagram: @The_Tactical_Wallet. I was surprised when I came across a post that mentioned, once again, one of their biggest mistakes was parking money into a retirement account, but not actually purchasing any equities or assets in order to accrue money. I don’t actually recall my reaction, or if I even replied, but I know in my head I was once again shocked and dismayed. It helped me once again to realize this is a much more common problem and mistake than I had thought.
Two days after seeing this on Instagram, once again I came across another individual who had made the same mistake. This time it was someone closer to me, who had many years of professional experience and was certainly not someone I could just write off as naïve or too young to understand. Upon hearing he too had made this error, I was convinced I needed to write a piece in an attempt to educate and recommend to anyone who might come across this article that opening an investment or retirement account and simply contributing money is not enough. YOU NEED TO INVEST IN ASSETS!
It is very common for financial advisors, or social influencers to remind folks they need to invest in their retirement accounts. What they typically don’t say, but imply, is that you need to invest within that vehicle in order to make any money.
Retirement account recommendations
For someone who is very new to investing or inexperienced, there are some simple recommendations I would make. If the investment vehicle is a 401(k), I would contribute my money to whatever the option is for an S&P500 Index Fund. Contacting the plan sponsor can help ensure the investments are allocated as desired. If the investment vehicle is the Government sponsored Thrift Savings Plan (TSP), it is common for TSP millionaires to invest in the C, S, & I funds (more on this in our specific TSP article). If the investment vehicle is an IRA (traditional or Roth), the investor must make the investments. In that case, there are many low-fee S&P 500 Index Funds the investor could purchase to grow wealth within the IRA. Some examples of S&P 500 Index funds include:
· Vanguard 500 Index Investor Share Class (VFINX)
· Fidelity 500 Index Fund (FXAIX)
· Schwab S&P 500 Index Fund (SWPPX)
· iShares S&P 500 Index Fund (BSPAX)
· T. Rowe Price Equity Index 500 Fund (PREIX)
· Vanguard S&P 500 ETF (VOO)
· iShares Core S&P 500 ETF (IVV)
· SPDR S&P 500 ETF Trust (SPY)
An investor would need to purchase one of these index funds within their investment vehicle to ensure the account is earning a return worth investing for. There are obviously many other options to invest in, including stocks, bonds, ETFs and mutual funds. Another reasonable option for someone looking to simply buy and forget about an investment is a Retirement Target Date fund. These are offered by many 401(k)s, TSPs, and can be purchased for IRAs. As a general rule, as a person ages, they should move into more fixed income assets and less into stocks. With that in mind, as people age beyond their thirties and get closer to retirement age, it makes sense to transfer some of their investment from these Index Funds and into bonds or bond ETFs. In order to keep this brief and as generic as possible, I’m only going to suggest the above S&P 500 Index Funds within this article but how to appropriately allocate a portfolio can be found within some of our other articles.
Bottom Line
To summarize this article, it is great if an investor is contributing to their 401(k), TSP, or IRA. Just contributing isn’t enough, though. The investor needs to actually purchase assets within those investment vehicles. S&P 500 Index Funds are great ways to do that, especially for a young investor. Most index funds and mutual funds will be better in the long run than just keeping your money in a money market account that loses money to inflation. If this is a mistake you or someone else has made, trust me, you’re not alone. You can’t fix the past, but you can ensure a better future by ensuring your money is being put to work and creating wealth for your future. Good luck, and happy investing!
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