I was talking to someone recently, asking about their investing. “I have a Roth IRA, so I’m good.” They said. While it is certainly good to have a Roth IRA opened and be putting money in it, there are at least 2 common mistakes I see people making when they open a Roth IRA account.
The first is not investing the money. Many people open a Roth IRA, send money to the account and that is it. They forget a very important step. That step is picking a fund to actually invest the money in. If the money is not invested you could be missing out on 9% or more a year in investment gains. If you have $10,000 in the account that’s missing out of $900 a year!
The second thing that people do is invest in the wrong funds. When I say “wrong” I mean expensive to own funds. There are many funds that are expensive to own.
Funds can have a front load.
Funds can have a high expense ratio.
Funds can have high turnover in an actively managed fund.
Funds can be poorly managed for taxes.
Funds can be poorly managed.
When you are picking a fund for your Roth IRA, you want to make sure you pick an index fund with a low expense ratio. Avoid index funds which have high expense ratios, of which there are also some available from bad managers!
You also want to make sure you pick the correct index fund as far as where in the world you are investing. Do you want exposure to Large Capitalization funds?
International funds?
Emerging markets funds?
REITS?
Bonds?
Be aware of these 2 pitfalls when investing in your Roth IRA or any account.