Congratulations! You’ve finally contributed some money to a brokerage account like an IRA or a Roth IRA so you can save and invest for your future.
But don’t make the mistake many first-timer investors do when they go down this road!
RELATED: Clark’s investment guide
Avoid this mistake with your IRA!
According to a Reddit thread, a lot of people are making a common error when they fund a brokerage account: They’re leaving their funds in a temporary settlement account without actually taking the additional step of investing the money!
When you open a brokerage account, the money your transfer to the account “lives” in a settlement fund until you choose to put it into this investment or that.
But what if you never select any investment?
The answer is that your money continues sitting there, earning paltry interest in a settlement fund, while it could instead be earning bigger bucks in the stock market.
And that gets to the heart of the mistake people are making. They’re transferring money to their newly opened brokerage account and thinking they’ve done everything they need to do.
In reality, that settlement account where your money lives at the brokerage is only intended to be a pit stop.
You’ve got to choose a final destination for your money — whether that be in individual stocks or in a basket of individual securities through a low-cost index fund or exchange-traded fund (ETF).
But if you fail to make a selection, it’s a “you snooze, you lose” kind of situation. Your money just sits there and doesn’t really work for you.
How bad of a problem is this really?
Let’s take the time machine back to 2008. Imagine if as the market were cratering, you had the foresight to contribute $10,000 to a brokerage account.
Now let’s say it went into your settlement fund and you never followed through by picking a fund to actually invest the money in.
Over a hypothetical period of 10 years, that money would only earn a little more than $300. That’s next to 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.
(Trying to time the market is never advisable, but let’s just see our logic through on this one…)
According to research by Charles Schwab, that money would be worth somewhere between $16,000 and $30,000 today — depending on exactly when you invested.
That’s a lot more than $300!
So, don’t make the rookie mistake of funding an IRA or a Roth or any other investment account but then not selecting a specific investment for the money to flow into.
How can you tell if you’re making this simple mistake?
Just log in to your brokerage account online and check the dashboard for something that looks this…
This particular example is from a Vanguard brokerage account that one member of Team Clark has.
This Team Clark staffer contributed the annual maximum to his Roth IRA — $5,500 for those under age 50 in 2018 — and used the money to purchase shares in an emerging markets ETF.
But for whatever reason, the whole $5,500 wasn’t invested. A little less than 20 bucks got hung up and has been hanging out in a Vanguard Federal Money Market settlement fund for the entire year.
Not a huge problem, but just an illustration of what you need to be on the lookout for!
If you need help picking low-cost investments, check out our recommendations here.
Meanwhile, if you recently opened a Vanguard brokerage account, see the Reddit thread for step-by-step instructions on how to make sure you’re allocate your money into an actual investment — not just into the settlement fund.