4 Mistakes You Absolutely Must Avoid When Investing for the First Time

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If you’re getting started investing, you don’t want to pick the wrong account or make any of these other major mistakes. Here’s why. 

If you’re thinking about investing your money for the first time, you need to make certain you understand what you’re getting into. Investing can help you build wealth, but it also creates the risk of losing your hard-earned money.

You don’t want to make investment choices you regret, so be sure to avoid these big mistakes when getting started.

1. Choosing the wrong kind of investment account

Choosing the wrong type of account to invest your money could be a huge mistake because of the opportunity costs associated with a big decision. See, you have a few different choices. You could invest in:

A workplace 401(k): This is an account your employer offers. The company may match contributions you make toward it. You also make contributions with pre-tax income. You can’t take your money out until retirement or you’ll face penalties. An IRA: You can open a traditional IRA with any broker you want. You can make tax-deductible contributions. You cannot take money out until retirement or you’ll be penalized. A Roth IRA: You can open a Roth IRA with most any broker. Your contributions aren’t tax deductible in the year you make them but you get to withdraw money tax-free as a retiree. You can withdraw contributions but not gains anytime without penalty, but usually won’t want to as you’ll need to leave your retirement money to grow. A taxable brokerage account: There are no tax benefits for contributions, but you can access your money whenever you want. You may pay taxes on gains when you sell assets and make a profit, but they are typically taxed lower than regular income.

Picking the right account type matters a lot. If you are saving for retirement, you should choose a tax-advantaged account as there’s no reason to pass on the help the government offers. If you contribute $1,000 to an IRA and can deduct the contributions, you could save as much as $220 on your taxes if you’re in the 22% tax bracket. Why give up those savings?

On the other hand, if you put money into a retirement account and end up needing to withdraw it sooner, you could face a 10% penalty, a huge hit to take for no reason. So think carefully about what you plan to do with the money before selecting what kind of account to invest in.

2. Picking the wrong brokerage firm

There are different brokerage firms you can open an account with. Most don’t charge commissions or account fees. But that’s not necessarily the case with every broker, so you’ll want to read the terms and conditions before opening an account.

Different brokers also offer different features. You want to use a broker you’re comfortable with, that has a desktop and mobile app you can use easily, and that offers tools you’ll use to help you become a better investor, such as ETF screeners or charts that track key metrics of stocks you’re interested in buying.

3. Paying unnecessarily high fees to invest

When you select investments, you must pay attention to the expenses you’ll pay. There are some low-cost ETFs (exchange-traded funds) that have very low expense ratios and are easy to invest in. There are also actively managed funds where you have to pay a high fee to a professional to pick assets.

Fees can dramatically decrease your returns. Let’s say you invested $10,000 over 20 years and earned an average annual 10% return. If you paid a 0.5% investment fee, your $10,000 investment would turn into $61,414. But if you paid a 2.5% fee, you would only end up with $42,484.

Don’t lose your money to high fees. Look for low-cost investments with a solid performance track record.

4. Trying to get rich quick

Finally, trying to get rich quickly is a recipe for disaster. There’s an inverse relationship between risk and reward and if you’re trying to chase high returns, there’s a strong chance you’ll lose money. Slowly, steadily building wealth through solid, reliable investments held over the long term is the surest path to success.

Fortunately, these four mistakes are pretty easy to avoid, so just keep them in mind and get started investing today so you can get on the path to building wealth the right way.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Christy Bieber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.

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