What’s a mutual fund?

’Tis the season when thousands of Canadians hold their breath, shut their eyes and commit a share of their earnings to retirement savings plans -- without knowing nearly enough about them.

Blake Phillips wishes it were different. He’d like to see people approach financial markets the way many shop for mortgages, as heads-up consumers wary about spending more money than they have to.

“No matter what you do in life, you’re going to want to grow your savings,” says Phillips, an assistant professor at the University of Waterloo’s School of Accounting and Finance.  “Everybody should be educated on the responsible way to do that.”

Phillips’ research focuses on the information that retail investors use to select investments, looking at the way investors interact with mutual funds and hedge funds.  “My research, and the bulk of academic analysis, suggests that investors commonly utilize irrelevant or perhaps even misleading information when selecting investments, such as advertising which appeal to investor’s emotions”.  

It’s not that people should avoid companies for advice and money management, Phillips says. Financial markets are filled with terms and products that are generally unfamiliar to those who don’t work in these fields. There is good information and sound advice available.

But he would like to see consumers become educated participants in the management of their investments, taking informed questions into meetings with their advisers: What are the annual fees for looking after that money and is there a charge to move my money in and out of the investment? What is the risk of a given investment and what is the corresponding risk-adjusted return?  How does the performance of a managed fund compare to the index used as a benchmark after fees?

Education rather than regulation, Phillips says, builds stability in financial markets. High school is good place to start, he adds. Why not make it a staple of the curriculum?

“Financial literacy is not taught at that level,” Phillips says. “I feel it should be.”