MICHEL MARTIN, HOST:
And now, we turn from getting a start in the job market to getting started investing and call us crazy, but we are guessing that, even if you never read the business pages or watch those cable shows where people are talking really fast over a stock ticker, then you still might have heard that the social networking site, Facebook, is offering stock for sale to the public for the first time on Friday. It's called an initial public offering and shares would cost at least $34 apiece.
Now, the social networking site has more than 900 million active users and we figured people might be thinking now's a good opportunity to invest for the first time. And, while investing can lead to big payoffs, it can also mean taking big risks. Just look at the chief investment officer of JPMorgan Chase, who recently resigned after the bank suffered a $2 billion loss.
So you might be thinking, if that can happen to top professional investors, what's a newbie to do? Well, who better to go to for some basic information than personal finance expert Louis Barajas? He's the author of a number of books.
Welcome back. Thanks so much for joining us once again.
LOUIS BARAJAS: Michel, always a pleasure.
MARTIN: So, first of all, why so much excitement about this Facebook IPO? Do you think it's because so many people use it that they figure that they understand it?
BARAJAS: They're engaged in it every single day. They're looking at their Facebook page and they're saying, wow. I can be part of this. I can be an owner of this and so there's a lot of interest. Unfortunately, the problem for most people - it's going to be not the best thing for them to do, but it's at least getting them interested in figuring out what a stock is and how I can buy stock and maybe I can start investing in the near future.
MARTIN: Well, yeah. Talk more about that. You're saying that, for most people, it probably isn't the best initial investment, at least. I mean, people often say that, if you're going to buy stock, you should buy in something that you use, believe in or like. So why wouldn't this be a good choice?
BARAJAS: Here's the thing. I deal with usually what I call the overlooked and underserved markets, people that normally do not invest in the stock market or invest at all. And if they go out and buy one individual stock and their money goes down and they don't know how this investment works, then they get this negative taste in their mouth and they're - most of the time, they don't want to go back into the market.
And so, usually, we need to take a step back and take a look at what we're doing and why are we - why do we want to buy a stock?
MARTIN: OK. Well, let's do that. What are the first questions you should ask yourself if you're thinking about getting started investing?
BARAJAS: OK. Well, first of all, what you need to do is you've got to sit down and take a look at your investment objectives, your goals. What are you trying to do? And don't tell me you're trying to make more money. We're all trying to make more money. But is it a short-term goal, a long-term goal? Are you trying to build your emergency reserves? Are you trying to pay down credit card debt? Are you trying to invest for your future in the down payment of a home?
You know, the next thing is the time horizon. How much time do you need? If you're going to have a very short time horizon, the last thing you need to be in, Michel, are in stocks. You have to give yourself at least a seven year timeframe in case your stock goes down, you're willing to wait for it to go back up. So you need to be patient. Those are the most important things.
MARTIN: So a seven year timeframe. If you need that money sometime within seven years, you're saying stocks - or at least putting all your investment money into stocks - not a good choice for you.
What about what investors call risk tolerance? You know, what is that and how do you figure out what your risk tolerance is?
BARAJAS: Basically, bottom line, it's volatility. Here's what I mean. You invest $1,000 in stock and, the very next day, you see it go down to $500. Can you sleep at night? Is your whole day spent on looking on the Internet seeing what your stock price is worth? That's what we're talking about. Risk tolerance. How much volatility are you willing to stomach? Is it 10 percent negative downturn? Is it a 20 percent downturn?
And the problem is that a lot of young investors really haven't gone through any of that and they say, oh, I can really handle a lot of risk, until you see that their stock's gone down 20 or 30 percent and then they're hating life and they're calling you every day and they want out.
MARTIN: And you don't want that.
MARTIN: You're happy to talk to them, but you don't want to be talking to them every day.
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BARAJAS: Not really. No.
So - no. If you're just joining us, we are just days away from the Facebook initial public offering, so we're talking about investing for newbies with personal finance expert, Louis Barajas. He's the author of a number of books and he's also a certified financial planner and he actually prefers to work with people who don't have a lot of experience. That's who he's most concerned about.
MARTIN: So is there a minimum amount of money that you should have before you start thinking about investing in stocks, which - as I think you probably want to remind people - means that you kind of have an ownership share in a company? I mean, is there any rule of thumb that you use?
BARAJAS: What I want to do is I want to make sure they have a comfortable emergency reserve, even if they've got $1,000. I want to see them put some money aside. I'm also going to take a look at their credit card debt and their school loans. If they've got credit card debt that they're paying at 19, 20 percent and then they're out there investing money where they're not sure what it's going to do, but they're not paying down their credit card debt, I don't want to do that. I want to work on that debt first.
And then, you know, they can start with as little as $50 a month investing and they can go to wonderful websites out there and Google a lot of these wonderful places that you can start investing for very inexpensively, because the other thing that we've got to talk about, Michel, are costs. You really want to focus on expenses and what they're charging you to invest. Those things will make a big difference over the long term.
MARTIN: If you want to start investing, who should you go to and is there somebody you should avoid?
BARAJAS: You want to avoid anybody who is charging you a commission, who's trying to sell you anything. And that's the only way they earn their money. I really don't like that conflict of interest and so I really like to work with what I call fee-only certified financial planners. But you know, the audience needs to understand that the only people in America that can really give you investment advice are registered investment advisors.
And a registered investment advisor - that's not a designation, nor is it an approval by a federal agency like the Securities and Exchange Commission or the state that they're in. People who are going to give you investment advice and are going to charge you for the investment advice must register with one of those agencies and, that way, they are a fiduciary for you, that they're putting your best interests first and that what they do for you is also suitable, that they're really taking the time and taking a look at is this the best investment for you?
And so, you want to always - I always talk about the three Cs. You want to look at their credentials. Also, you want to double-check their character and, again, what we just talked about is, you know, their compensation. How are they charging you?
MARTIN: OK. So the three Cs. Keep that in mind. So I know a lot of people will have been reading about this big loss at JPMorgan Chase and they might be thinking, gee, if somebody who invests all day for a living can make a big mistake like that, what hope do I have?
BARAJAS: What the problem is, that for the average investor, they have to take a look at what's happening and what gets most people - whether you're a highly intelligent investor or non, what gets in the way is behavioral - what I call behavioral finance or greed or fear.
The mistakes that they were making were based on greed and anytime you make decisions based on greed or fear, whether it's your own personal investing, you're always going to end up losing. And that's why it's really important to get a lot of information before you invest. You also know that you're well diversified and the last couple of things we want to talk about is you never invest in anything you don't understand and you never borrow money to invest.
MARTIN: All right. Louis Barajas is a certified financial planner. He's the author of a number of books, including his latest, "Small Business, Big Life for Women," and he was kind enough to join us from Costa Mesa, California.
Louis, thanks so much for joining us once again.
BARAJAS: Always a pleasure. Thank you so much, Michel.
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MARTIN: Coming up, it might surprise you to learn that nearly one in five children adopted in the United States now comes from Ethiopia.
BRIDGETT DAVIS: I wanted to, if I could, adopt in this African country and sort of help myself and perhaps help that child at the same time.
MARTIN: We'll hear from a group of moms who have all adopted from Ethiopia. They all had different experiences and we'll hear about them next on TELL ME MORE from NPR News. I'm Michel Martin.
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MARTIN: When he was growing up, Yul Kwon didn't see many people who looked like him on his favorite TV shows and, when he did, too often, they were the usual Asian man stereotypes; geeks or feckless foreigners. So Yul Kwon set out to change the game on the hit reality TV show, "Survivor," and won.
YUL KWON: I don't have to play a stereotype. I don't have to play a role when I'm speaking with an accent.
MARTIN: That's next time on TELL ME MORE. Transcript provided by NPR, Copyright National Public Radio.