If you are interested in learning about the stock market and how to take control of your money, it's worth considering joining an investment club. These are groups of people who pool their money to make joint investments, usually in stocks or bonds. Their primary motivation is to make the most money possible, but investment clubs are also a great way to share ideas and learn about the market.
But before you join one, there are a few things to consider.
Key Takeaways
- Investment clubs offer individuals a chance to learn hands-on about the stock market in a social atmosphere.
- Most investment clubs require an initial payment to the pool and a modest monthly contribution going forward.
- Investment club members need to pick a club that invests in their preferred style and at their preferred risk level.
How Are Investment Clubs Set Up?
Investment clubs have been around for decades as a way for people with modest amounts to invest to partake in larger investments and get first-hand experience and education. They are social groups at heart, with members sharing and debating ideas.
An investment club should be set up as a legal partnership or a limited liability company (LLC) consisting of 10 to 20 members. Once it is legally established, standardized accounting records must be established for it. This provides members with the confidence that the money they contribute is not being misused and the record-keeping that will be needed for tax purposes.
Monthly Activities
After an initial lump sum contribution, a member will be required to make a monthly contribution to the pot, usually about $80. Since new members may join and others cash out at any time, the club must have a way to calculate each member's share of the assets at any given point in time.
New clubs need to establish a brokerage account in the club's name. Shopping around for a suitable brokerage firm is a good idea, The lower the fees the better it is for the club's membership.
Aninvestment club needs to hold meetings at least monthly. These meetings can be fun and insightful. Members take turns presenting a stock, fund, or exchange-traded fund (ETF) that they think the club should consider buying. Staying in touch by email or text between meetings keeps the club members involved and informed.
Tips for Joining an Investment Club
1. Think Long Term
Don't buy stocks through an investment club if your time horizon is a year or less. Trying to make money over a shorter period of time is abad approach for beginner investors and for clubs. A short time horizon requires quick buy and sell decisions that investment clubs can't handle.
Having a three- to five-year horizon is a better outlook. It's also better for the club, which is not set up for constant membership churn.
In fact, most investment clubs specify rules or penalties for early withdrawal from the club. Most specify a liquidation price, or early-withdrawal penalty, which members must pay when withdrawing their funds.
Some investment clubs do not pool club members' funds. The members invest their own funds following the club's decisions.
2. Define Your Investing Style
Just as individual investors vary greatly in investment style, such as value investing or income stock strategies, so do investment clubs.
Every club needs to have a clearly defined investment style, ideally with some quantifiable rules or limitations on the club's investment portfolio. For example, an investment club might specify that members can propose only stocks that have aminimum share price or market capitalization. Or, the club might place sector restrictions on portfolio choices to ensure diversification.
It is also useful for a new investment club to set standardized criteria for reviewing a stock for potential purchase. That gives club members some experience in equity analysis and provides a rational basis for presentations.
Going Forward
Once an investment club has determined its style, every member must be aware of the club's investing style and willing to follow those guidelines. A club can go off the rails if some members want to invest club funds in risky penny stocks while others gravitate towards blue chips.
If you are starting the club, make sure every member understands and supports the club's approach. If you join a club, ensure its style meets your needs. If it doesn't, another club probably does.
3. Join a Club Association
The National Association of Investors Corporation (NAIC), also known as BetterInvesting,offers support and information for people wishing to join or start their own investment club in the United States.
The NAIC provides excellent tools and publishes a monthly investor-learning magazine. For membership packages, visit the BetterInvesting website here.
According to NAIC data, the number of investment clubs registered with the association has seen strong growth in the early 21st century, and about half of all registered clubs have outperformed the S&P 500. That's a level of returns most mutual funds are unable to achieve consistently.
In the U.K., ProShare Investment Clubs offers resources such as newsletters, online portfolio tools, a message board for members, and an investment club manual. In Canada, the Investors Association of Canada (IAC) offers in-depth newsletters on personal finance education, discounts on books, and the like.
4. Always Value Education
The main goal of an investment club is to make money for its members but education is another good reason to join. Clubs that operate with the goal of educating their members will find that profits naturally follow.
The educational aspect is arguably more important. If an investor has no interest in developing investing skills and knowledge, investing in a fund or hiring a full-service broker can provide a reasonable return without the commitments and activities inherent in an investment club.
An investment club should also focus on ensuring that all members receive a relatively equal level of educational value from their membership. In fact, it is a good idea to assess a club's level of member expertise before you decide to join. This ensures there is a reasonable match with your own skill level. Also, all club members should participate equally; some members will naturally carry more of a leadership role than others, but if some members do not contribute periodically to the club's meetings, the atmosphere of the entire club is likely to suffer, decreasing the value everyone receives from their membership.
Should I Join an Online or an In-Person Investment Club
It's your choice. Today's investment clubs are often hybrids, forming with a core of like-minded neighbors but meeting virtually for convenience. The non-profit BetterInvesting association has tips for getting set up online.
How Many Members Should an Investment Club Have?
Most investment clubs have eight to 12 members, although a few grow to 20 or more.
It's important to keep the club relatively small. It gives everyone a voice and an opportunity to participate. A larger group can spend more time arguing than decision-making.
In addition, the larger clubs tend to buy and sell too many stocks too frequently, leading to relatively poor results once trading costs are factored in.
Are There Specialized Investment Clubs?
Investment clubs that specialize in stocks are the best known and probably the oldest, but there are many others.
Real estate investment clubs have been extremely popular in recent years, due to the latest real estate boom. The interest may well have tapered off as interest rates began to chill the housing market in 2022.
There also are business investment clubs, also known as incubators. These clubs specialize in investing in promising new business ideas, pooling their cash for greater impact.
The Bottom Line
Investment clubs are a great way to ease into investing. Whether you start your own club or join an existing one, you'll find that being a member of a club is an enlightening experience.
One of the valuable benefits of an investment club, especially for beginners, is the exposure to different points of view. Hashing out investing ideas with other individual investors on a regular basis can be an enlightening experience.
