How to grow your money : Avoid your Biggest Investing Mistakes

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Being specific is important when it comes to setting goals.

New investors often think about potential returns before figuring out what they really want, and that is a big mistake, according to Josh Brown, CEO of Ritholtz Wealth Management.

"Once you start defining your goals, an interesting thing happens, you realize that you don't need to take the maximum amount of risks to hit them," Brown said.

Then, with a specific goal in mind, you can work your way backward and come up with a plan to get there. Brown says the goal can be as specific as someone wanting to be able to afford a house in the mountains in 10 years. That will give you an amount and a time frame to design your portfolio around.

 you should never start with the return

you want and just pull a number out of

thin air

you should say in 10 years my husband

and i

uh would like to be able to afford a 300

000

house in the mountains because we love

to ski and so if you know that that's

what you're saving for then you work

backwards

the biggest mistake the average investor

is making is not

having a definitive well thought out

answer to the question why am i

investing in the first place

once you start defining your goals an

interesting thing happens

you start to realize that you don't need

to take maximum amount of risk to hit

them

especially if your goals have a lot of

time in order for you to get there

understanding what you want what you

want your money to grow into and what

you'll be spending it on

and then working backwards is a better

way to come up with a portfolio

than just starting and let's see what

happens

what's the down payment that we're

working toward okay great that's the

number so how do i get to that number what

portfolio mix gives me the optimal chance of success

understanding that there will be

drawdowns along the way

understanding that there will be

volatility once you know your number

then you have to ask yourself is this

realistic if the number you arrive at is

i need to make 12

a year and i tell you that the market on

average delivers eight percent

uh stock market bonds are more like

three and then i tell you inflation

is a factor well then you say okay i

don't think i can earn 11

after inflation and so that becomes a

question of am i saving enough

so there are a lot of different levers

that you can pull as an investor

to hit these goals but you have to know

what they are the alternative is

you're throwing your money at mutual

funds with very little understanding of

what role they're playing in your life

and what they're trying to accomplish so

we talk about goals based financial

planning first

we never talk about a portfolio with an

investor until we know

the why what are you trying to do