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Some brokerage account mistakes can have a huge impact on your financial future. Learn what to avoid doing with your brokerage account and investments.
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Your brokerage account is one of your best wealth-building tools. You can use it to grow your money by investing in stocks, bonds, and other assets. If you do so consistently, this can potentially lead to hundreds of thousands in returns — or more.
If you don’t manage your brokerage account well, it can cut into your returns. Or, even worse, you could end up losing money. That’s why it’s important to know about the most common places where investors go wrong with their brokerage accounts, so you can avoid doing the same.
1. Day trading
The easiest and most effective way to invest is long-term investing, but some people don’t like doing it the slow, steady way. So, they try day trading to make money more quickly. Day trading is when you buy and sell investments on the same day, although it’s also often used to refer to any type of short-term trading.
The problem is that trying to make money more quickly usually leads to not making any money at all. Several studies have looked at what happens when you day trade, and the vast majority of investors lose money this way.
2. Making impulsive investment decisions
Investors often get into trouble by making rash, emotional decisions with their portfolios. For example, you see that the stock market has dropped, so you rush to sell your stocks right away. You then end up selling low and missing out when the market rebounds.
Always take a big picture perspective with your investments. Don’t let short-term issues like sensationalist headlines in the news or a price drop cause you to make decisions you’ll regret. Invest in companies that you expect to have long-term success, and don’t get rattled during periods of volatility.
3. Checking it every day
It’s good to stay on top of your finances, but you don’t need to check your brokerage account as often as you may expect. Once a month is more than enough, and some investors opt for once every quarter or even every six months.
When you have investments that you’re planning to hold onto for years, there’s no need to monitor every daily price change. In fact, this can be problematic. Seeing prices go up and down can be unnecessarily stressful and lead to those impulsive investing decisions.
4. Only investing in a small number of stocks
Diversification is the name of the game with investing. Even if you think you’ve found a few great picks, it’s far too risky to hitch your portfolio to a small number of stocks. If just one or two of them fail, it could lead to heavy losses.
A properly diversified portfolio should have at least 25 stocks across a variety of industries. While you could pick these yourself, another option is an investment fund that contains a large basket of stocks. Exchange-traded funds (ETFs) are a popular choice. These tend to have low fees, and you can have a diversified portfolio by investing in as few as one ETF.
5. Overpaying in fees
Fees are one of those seemingly small details that have a massive impact on how much money you make. If you’re paying a hefty fee to a financial advisor or for an investment fund, that can take a huge chunk out of your profits.
Let’s say that you have $1,000 per month to invest. You could put it in an ETF that tracks the whole stock market for a 0.1% fee. Or, you could invest with a financial advisor for a 1% fee. Even the experts typically don’t outperform the market, so we’ll say you can get an 8% annual return either way. Here’s how much more that higher fee costs you over 30 years of investing:
Although it can seem difficult, learning how to invest really isn’t. It’s all about finding good long-term investments and putting more money in them on a regular basis. If you’re not sure what to invest in, funds that invest in a large number of stocks for you are a relatively safe choice. After that, just make sure you avoid any of those expensive mistakes.
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