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Starting in 2010, Tess Waresmith spent three years working on a cruise ship, first as a diver and acrobat, then as a holiday shopping guide.
For someone who graduated college a year early, it was a huge opportunity, Waresmith says. Not only was it a paying gig in a recession-hit economy, but the food and lifestyle on board was covered.
“For over a year, I thought to myself, ‘This is my chance.’ save as much as possible” says Waresmith.
After a couple of years of dutifully withdrawing the money, a shipmate suggested he could do more with his funds than just let them sit in the bank.
“He said, ‘Tess, you can use the money you’re saving to buy things that make you more money,'” she says. “I knew investing was a thing, but I never thought about it in that frame.”
Waresmith, now 36, took that advice and ran with it. He currently has over a million dollars in stocks, real estate and other investments. In 2021, he founded a financial education company Wealth with Tesshoping to help others follow his path, avoiding some pitfalls.
In those early years, Waresmith remembers one trap in particular.
“With investing in the stock market, I was afraid of doing it wrong, so I hired a financial advisor, and they made a lot of very bad decisions on my behalf,” he says. “I was paying more than 2% in fees. They sold me an annuity better suited for people in their 50s. I was 26.”
Here’s how you can avoid falling into a similar trap.
Educate yourself: “It’s hard to spot red flags if you don’t have the basics”
Waresmith did what many experts might suggest: hire a professional. But because he didn’t know much about finance, Waresmith didn’t know that his chosen advisor was making the perfect strategy on his behalf.
“It’s hard to identify red flags if you don’t have a basic knowledge of investing. And when I say basic knowledge, I mean read a book or two or take a course,” he says. “You don’t have to have a doctorate or be an analyst to invest, but I didn’t see the red flags because then I wouldn’t have been able to recognize them.”
It took him a while to realize that his portfolio was lagging the market, both because his advisor had chosen him mutual funds with poor performance and because high fees were eating into his returns.
Instead of charging a flat ratehis advisor charged a fee equivalent to 1% of his portfolio value, plus 0.25% for using the advisor’s online investment platform. Some of the active mutual funds chosen by his advisor came with expense ratios as low as 0.75%.
The strategy, Waresmith eventually realized, was to make things more complicated than necessary. “These were actively managed mutual funds and there were dozens of them,” he says. “It was over-engineered.”
Then there’s the annuity, an often expensive financial tool to provide retirees with income in exchange for a predictable lump sum. Waresmith put up $20,000 – money he has been unable to recover.
“When I turn 60, I’ll get a couple of dollars a month, or something like that,” he says. “It was a big mistake. No one should have sold that to me.”
Keep things simple: “Index funds are a great way to start”
Once he realized he was being charged for an overly complex plan and poor performance, Waresmith cut ties with his adviser and tried to keep things simple.
Instead of paying an expensive advisor to manage expensive funds, he opened his own account and invested in low-cost index funds.
The advantages of investing this way are well documented. Index funds aim to replicate the performance of a market index rather than trying to outperform it. While some active managers manage to outperform the market, most do not. Over the 10 years ending June 2024, about 29% of active funds outlived their average indexed peer. According to Morningstar.
Funds that track popular indexes, such as the S&P 500, give investors exposure to a wide range of stocks and have very low costs.
“Index funds are a great way to get started and understand the fundamentals of the stock market and invest your money in a really diversified, low-cost way,” says Waresmith.
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