Considering investing, but don't have the money? Try an investment club. The low-risk setting allows low-income investors a chance to share in a pool of money and quickly build a group portfolio. This activity also provides members with ideas on how to develop their own personal portfolio. Novices learn the basics. Pros enhance their skills. Overall, the environment develops camaraderie.
How Investment Clubs Work
There are more than 35,000 investment clubs in the U.S., according to the National Association of Investors Corporation (NAIC). Groups of friends, coworkers, neighbors and relatives averaging between 10 and 20 members make up the club. The clubs typically get together once a month. Members may contribute dues ranging between $25-100 at each of the meetings. The money is used for investments, such as stocks, mutual funds and bonds. In 2006, the average investment club was four years old with 11 members, according to Better Investing, an investment education non-profit organization. The average member contributed $84 and had a portfolio worth $86,700.
The clubs operate like a business. The meetings typically begin with a roll call, an economic report and a treasurer's report. A stock presentation is made by a member or members who have researched a company within an industry. The group's members discuss the opportunity and then vote. If two-thirds of the members like the purchase, the treasurer proceeds with the transaction. Some experienced clubs recruit the help of a discount broker to place an order rather than a full-service firm. If members dislike the choice, the cash collected is placed into an account. The members review and analyze studies about investments and select and buy stocks. The members will review their current holdings, goals and participate in an educational program before they adjourn. (For more, see Choosing A Compatible Broker.)
An investment club doesn't have to register with the U.S. Securities and Exchange Commission, but if it did it would need to adhere to the Securities Act of 1933, which allows for the membership interests in securities and those offered and sold to be subjected to federal regulation. The club will also have to follow the Investment Company Act of 1940 which states and the club can exist and be regulated.
What Investment Clubs are Not
Investment clubs are not a get-rich-quick scheme. Joining an investment club doesn't make you an instant millionaire. Members are focused on the long haul.
The members are not all financial experts, attorneys or accountants. They are people with several different career backgrounds. The clubs also differ from professional money managers. They don't encounter requests from clients inquiring about short-term performance. The clubs can take more risk, such as investing in fast-growing small companies.
Benefits of Investment Clubs
Investment clubs have strength in numbers, which means a wide-array of perspectives on a particular stock or market trends. This provides more flexibility to venture into new territories.
Research is divided up among the members, as opposed to putting in a great amount of time in effort on your own. The pooled money provides more purchasing power, allowing the group to put big bucks into profitable investments.
Disadvantages of Investment Clubs
Investment clubs require commitment of time and effort. The club members share their opinions about an investment and you as an individual don't have the final say. Also, the clubs are not immune to scams. In 2009, a federal complaint revealed some members of Homepals Investment Club fell victim to a $14.3 million Ponzi scheme. Three perpetrators promised guaranteed returns of 100% every 90 days. One of the culprits, alleged to have boasted of his trading success, traded no more than $1.2 million of the $14.3 million raised and lost 20% of the clubs funds. (Read What Is A Pyramid Scheme? before investing in any club that promises phenomenal returns.)
Choose a Winning Club
Make sure the objectives are clearly defined before investments are purchased or sold. One of the main objectives should be to double your money every five years, according to the NAIC, but this requires an average 14.9% compounded annual growth rate. This growth rate shouldn't be expected every year, but from one stock market peak to the next.
- Examine the chain of command.
The offices usually include a president, vice-president, secretary and treasurer. Some clubs may have an educational officer, a club economist or a stock selection committee.
- Consider how new members are selected and supported.
Potential members should realize they aren't playing with the market but learning and are aware of the rewards, risks and responsibilities. The packet of information provided to prospective members needs to include a partnership agreement, bylaws, investment philosophy, critieria for stock research, a sample meeting agenda and description of member responsibilities, according to the NAIC.
- Education programs are a consistent focus of successful clubs.
Find out if the members are taking courses conducted by local NAIC councils, reading trade books, subscribing to market-oriented magazines such as Forbes and Better Investing, have had guest speakers visit or attended the annual National Investors Congress of NAIC.
The Bottom Line
Investment clubs can be an affordable way to ease into the stock market and other investments with some help from your peers. Do ask yourself if these are people you're comfortable with as partners in a business. Determine whether all the checks and balances are in place. And, clear your schedule because investment clubs are a year-round monthly commitment.