It was 2011, and I had just completed a stock-picking contest as part of a third-year finance course at university. With an increasing understanding of the stock market, our team had managed to earn a 7% return over the 3-month competition. As part of the project, we monitored daily news and wrote weekly reports about the stocks we had chosen and our reasoning. I still remember buying shares of Apple after listening to a Telus earnings call. Telus had signed up more mobile phone plans than expected, and I figured each of those plans needed an iPhone. There I was, 21 years old, and I thought I had it all figured out.

My first stock pick

The only downside to the whole experience was that the money wasn’t real. We had used $100,000 in a simulation to replicate the experience of investing in the stock market. I figured the obvious next step was to take my success and carry it into the real world. I decided my first investment would be into Research in Motion, the maker of the Blackberry smartphone. Growing up in Kitchener, it was impossible to miss the rise and fall of Research in Motion. The growth that Apple was experiencing at the time was at the expense of Blackberry smartphones. Research in Motion’s stock price had tripled in the year following June 2006. It then collapsed, losing almost 70% from its peak in just months.

I was four years removed from Research in Motion’s peak stock price, but my mind couldn’t let go. As a result, I walked down to my local bank branch to invest $1,000. I planned to open a Tax-Free Savings Account (TFSA) so that I wouldn’t need to pay taxes on any profits. I sat in the lobby of the bank, waiting to set everything up with a financial advisor.

Minutes into the conversation, I realized I’d underestimated what was involved. I was informed:

1. I needed to open a brokerage account to invest directly in the stock market, and the financial advisor couldn’t help me with this as it wasn’t a branch product.

2. If I did open a brokerage account, I’d need to pay $29 commission each time I bought or sold a stock. This meant I’d have to make 6% on my investment just to break even.

3. If I invested in just one stock, the chance of losing a large portion of my money was higher, something I didn’t much fancy as a student.

The alternative—investing in a mutual fund

In the end, the financial advisor offered an alternative. They mentioned I could invest the $1,000 into a mutual fund that would then buy 100s of stocks for me. Since the bank branch offers mutual funds, they’d also be able to open the account for me. The best part was that I wouldn’t need to pay a commission to buy or sell the mutual fund.

The financial advisor showed me a list of mutual funds to select from. There were several different columns with labels and percentages that I didn’t fully understand. I had gone in planning to buy a stock, so when the topic switched to mutual funds, I was lost. Rather than ask the advisor to explain what all the columns meant, I tried to save face and instead pretended I knew what was happening. My eye caught the column titled MER. As a third-year finance student, I was used to finding the expected return of random events. My mind immediately thought MER meant ‘Mean Expected Return.’ I thought this was how much I could expect to earn from investing my money in the mutual fund.

As I looked down the column, I was shocked at how low the numbers were. Most were around 2%. If I was going to invest in the stock market, I expected to be able to earn more than 2%. Therefore, I asked the advisor to find the mutual fund with the highest MER there was. I was presented with an ‘actively managed growth’ mutual fund with an MER of 2.8%. I still couldn’t believe how low it was, but I was too embarrassed to voice my concern and misunderstanding. I agreed to invest my $1,000 into the high MER mutual fund and walked out of the branch feeling confused yet mildly accomplished.

A critical realization

It took about a month before I realized the mistake I had made in the branch that day. I learned that MER wasn’t the ‘Mean Expected Return,’ it was the ‘Management Expense Ratio.’ 2.8% wasn’t what I could expect to earn, it was how much of my money I would pay to the bank each year. By asking for the mutual fund with the highest MER I had effectively asked for the most expensive mutual fund they had. Immediately I was motivated to learn more about mutual funds to find a suitable replacement. I learned about lower-cost funds that invested in a set list of stocks instead of actively picking and choosing the investments. Within months of walking into the branch to invest in a single stock, I had found a low-cost mutual fund that invested in 100s of companies for me. The fund lowered the chance that I would lose money since it invested in a diverse list of stocks. I was also able to avoid the $29 commission each time I wanted to invest more money.

What I learned from the experience

There are three key lessons I took away from the experience.

1. Financial literacy is an important topic to empower people to take advantage of their money confidently. Without sharing what we’ve learned with others and putting systems in place to help inform people, we’ll all face challenges. While you may feel overwhelmed today, research and experience can get you where you want to be.

2. Even though I initially invested in the most expensive fund the bank had, the experience of starting early and learning as I went left me better off than if I’d waited. Get started investing as soon as you can and learn through the process.

3. We’re wired to be bad at investing in individual stocks. I was overconfident in my ability to pick the right stocks because of a short 3-month contest, and my mind clung to the high stock price Research in Motion once had.

I wrote The Snowman’s Guide to Personal Finance to help others learn from my experience. If you’d like to read the full book or gift it to a colleague, friend or family member, it’s available for purchase here. To ensure it’s accessible to as many people as possible, the content is also available entirely for free here on my website.