I never quite understood how subprime lending was able to ravage so many communities until recently. I attended an investing workshop in Brooklyn, New York. The presenters were from a company called Goal Mine and, along with teaching about how to invest, they used us as a focus group for an investment product not yet on the market.
The beginning of the workshop went smoothly. After we received hearty slices of pizza, the presenters passed out little cut-outs that resembled AMEX and VISA gift cards that you can purchase from CVS pharmacies. The offer: What if these cards were sold at a cost of about $3.75 and redeemable for $25 to put toward a mutual fund?
“So you don’t need a bank account to set up an account or invest in mutual funds?” I asked.
“NO!” replied the young female presenter excitedly, and then explained that this was the “beauty†of the service. Even if you didn’t have a bank account to transfer the money from, you could simply purchase one of these redeemable cards to put toward the investment. My first thought: If you don’t have a bank account, you should not be investing in mutual funds. In order to invest, it’s important to first understand the fundamentals of money and money management, something most people gain an appreciation of through maintaining a bank account.
“Many people in impoverished areas are called ‘unbankable,’†says Dorethia Conner, a personal finance coach out of Warren, Michigan. “These are people who do not qualify for conventional lending and end up paying much higher interest rates when they are approved for loans. They may not have bank accounts, may operate cash only, or use Rush Card [prepaid debit card] types of services.” The unbankable segment of the population is especially attractive to certain lenders and institutions.
Conner urges anyone thinking about investing to first start with the basics. If you don’t have a regular savings account because of monies owed, “pay the bank off so you can open an account.â€
With the service Goal Mine would provide, customers would be able to go online, create a profile, and establish a savings goal (e.g., a vacation, car, home purchase). Then Goal Mine would match you
(Continued on page 2)
up with one of five mutual funds that best fit your goal. If there wasn’t a mutual fund that fit, they would offer you an FDIC-insured savings account. The problem here is that mutual funds are for long-term goals–such as retirement–not for upcoming vacations and car purchases.
Furthermore, Goal Mine would allow investors to withdraw from their mutual fund for $1 and with no penalty. There was no mention of capital gains taxes either (the profit earned from buying an investment or other asset at one price and selling it at a different, higher price). In effect, the account could operate as a checking account instead of an investment fund. Also,
if you were to use the company’s savings account, you’d be charged for every withdrawal–which is absurd considering all the free savings accounts offered by local banks. What did the company say the benefit of having this mutual fund was? Your money isn’t so accessible, so you’ll be less inclined to withdraw. Basically, their “mutual fund” would operate like a money market account but without the high interest rate and the free withdrawals.The presenters did not mention what types of mutual funds the money would be invested in (large cap, small cap, emerging funds, etc.), and the funds were only three years old to begin with, which is a major red flag for anyone looking to invest in mutual funds.
The company seemed to be offering a product that would take advantage of people’s lack of knowledge about investing, preying on the less sophisticated investor. The unfortunate thing is, many of the people in the room bought it. “I have confidence in this. I support it. I think you’re going to have to have more workshops like this to get people into it,” said one woman who looked to be above the age of 55.
Conner offers these tips if you are looking to invest in mutual funds:
- Look for a fund that has been in operation for at least 10 years
- Make sure the fund manager has managed the fund for at least 5 years, but preferably 10 years
- Select a fund with an 8%-12% rate of return
- Pay off the bank! If you do not have a bank account, get right with your financial institution. Pay what you owe and re-establish your account.
- Research the companies within the mutual fund. Have any of them received bad press?
- Ask for a prospectus, which gives an overview of the fund
- Research! Check out MorningStar.com for more information on your mutual fund