My biggest investing mistake: I didn't see the red flags.

Since 2010, Tess Waresmith has spent three years working on a cruise ship, initially as a high-diver and acrobat, and later as a shopping guide for tourists.

Waresmith says that for someone who had graduated from college a year earlier, it was a huge opportunity to have a paying job on a ship in an economy that was otherwise struggling with recession, as food and living expenses were also covered.

"Over the past couple of years, I had a thought: 'This is my opportunity to save as much as possible,'" Waresmith remarks.

A friend on the ship suggested that my friend could be putting her savings to better use than keeping them in the bank after a few years of saving diligently.

""I knew that investing was a thing, but I'd never thought about it from that perspective," she says."

Waresmith, now 36, followed the advice and became successful in investing. She currently has over $1 million in stocks, real estate, and other investments. In 2021, she founded a financial education firm, Wealth with Tess, to help others achieve financial success while avoiding common mistakes.

In those early years, Waresmith remembers one pitfall in particular.

""I was hesitant to invest in the stock market due to fear of making mistakes, so I sought the advice of a financial advisor. However, they made several poor decisions on my behalf, resulting in high fees and an annuity that was not suitable for my age," she states."

Here's how she says you can avoid falling into a similar trap.

Identifying red flags is difficult if you lack fundamental knowledge.

Waresmith, lacking expertise in finance, unknowingly hired an advisor who implemented an inefficient strategy on her behalf.

"Identifying red flags in investing is challenging if you lack basic knowledge. However, you don't need a Ph.D. or be an analyst to recognize them. I didn't see any red flags because I wouldn't have been able to recognize them due to my lack of knowledge at the time."

She discovered that her portfolio was underperforming the market due to her advisor's selection of underperforming mutual funds and high fees reducing her returns.

Her advisor charged a fee equivalent to 1% of the value of her portfolio, plus a 0.25% to use his online investing platform, and some of the actively managed funds he selected had expense ratios above 0.75%.

Waresmith eventually realized that the strategy was over-engineered, with dozens of actively managed mutual funds.

Waresmith invested $20,000 in an annuity, a costly financial instrument that promised retirement income, but she hasn't been able to recover her initial investment.

"When I turn 60, I'll receive a monthly income of a few dollars, or so I was told," she says regretfully. "It was a huge blunder. No one should have convinced me to buy that."

Keep things simple: 'Index funds are a great way to get started'

After realizing that she was being charged for a complex and underperforming plan, Waresmith cut ties with her advisor and aimed to simplify things.

Instead of hiring an expensive advisor to manage expensive funds, she opted for a low-cost index fund.

The evidence supporting the benefits of this investment approach is substantial. Index funds aim to mirror the performance of a market index, rather than attempting to surpass it. Despite the efforts of some active managers, the majority fail to outperform the market. Over the past decade, approximately 29% of active funds have endured and outperformed their average indexed counterpart, as indicated by Morningstar data from June 2024.

Investing in funds that follow well-known indexes, such as the S&P 500, provides exposure to a diverse range of stocks at minimal expense.

Waresmith advises that index funds are an excellent way to begin learning about the stock market and to invest in a diversified, low-cost manner.

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