Investing in the stock market can be intimidating at first.
Investors must figure out how to differentiate between the different types of securities, investing styles and trading strategies, analyzing market data and financials. Financial planners and brokers are good sources of advice, but if you are interested in learning about the stock market and how to take control of your money, an investment club may be worth considering. (See also: Guide to Stock Picking Strategies.)
Investment clubs can be found in most municipalities and regions, and have been around for decades as a way for people with limited funds to contribute and partake in larger investments as well as to get first-hand experience and education. Investment clubs are simply a group of people who pool their money in order to make joint investments, usually in stocks or bonds. While their primary motivation is to make the most money possible, clubs are also a great way for investors to share ideas and learn about the market.
How Are Investment Clubs Set Up?
An investment club is usually a legal partnership or a limited liability company consisting of 10 to 20 members. Once it is legally established, it is imperative that standardized accounting records are established for it. After all, unlike independent individuals investing directly into the stock market, an investment club pools money from each member.
After a member initially contributes an initial lump-sum for investment purposes, the typical investment club requires a monthly contribution of about $80 from members. Nevertheless, members may not contribute the same amount, nor be participants for the same duration. Therefore, an investment club must have a clear way of determining each member's share at a given point in time since members are likely to be contributing funds on a periodic basis and probably intend to withdraw funds from their share of the club's assets at some time in the future.
Also, when first starting a club, be sure to establish a brokerage account in the club's name. Shopping around for a suitable brokerage firm is a good idea, as different brokers usually have unique offers for investment clubs. (See also: Choosing a Compatible Broker.)
An investment club should schedule regular meetings at least monthly. Such meetings can be fun and insightful, as members present a stock, fund or ETF they have researched and would like the club to consider buying. Staying in touch digitally in-between meetings is crucial, as well.
Club members carry the responsibility of researching potential investment purchases for the club and staying up-to-date on the performance and outlook of their holdings going forward.
Tips for Joining an Investment Club
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 a bad approach, not only for beginner investors but also clubs. A short time horizon makes it difficult to manage the club's money because, for short-term outlooks, decisions to buy or sell stocks need to be made very quickly and most clubs only meet monthly.
Having a three- to five-year horizon is a common outlook among investment club strategies. As such, potential members should also consider joining an investment club as something of a long-term commitment of about three to five years. It is generally not very healthy for a club if members decide to leave and pull their money out after a short period of time. Most investment clubs specify the rules or penalties for early withdrawal from the club at its inception. Most specify a liquidation price, or early-withdrawal penalty, which members must pay when withdrawing their funds, which is usually slightly lower than the value of their contributions.
2. Define your style
Just as individual investors vary greatly from one another in terms of their investment style – such as value investing, income stock strategies or GARP – so do investment clubs. It is important for every investment club to have a clearly defined investment style, ideally with some amount of quantifiable rules or limitations on the club's investment portfolio. For example, an investment club might specify that members can propose only stocks for purchase that have a minimum share price or market capitalization, or the club might place sector restrictions on the portfolio to ensure a minimum level of diversification always exists.
Also, for the benefit of members, it may also be useful for a new investment club to implement standardized criteria for reviewing a stock for potential purchase. This will ensure the club members increase their experience in specific areas of equity analysis while allowing all members of the group to brief themselves better for standard material covered at meetings, and hopefully better understand the material presented to them.
Once an investment club has determined its style, it is important that every member is aware of the club's investing style and willing to follow those guidelines. It can be very damaging to an investment club's atmosphere when some members want to invest club funds in high-risk 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 are joining a club, make sure its style meets your needs. If it doesn't meet your needs, there's probably another club that 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 not only provides excellent tools but also 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 – a level of excess returns most mutual funds are unable to consistently achieve. That being the case, however, market-beating returns do not contain all of the value a member receives from a well-run investment club.
In the U.K., this is called ProShare Investment Clubs, which offers a host of 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) also offers in-depth newsletters on personal finance education, discounts on books and the like.
4. Always value education
While investment clubs should strive to make as much money as possible in the markets, education is one of the primary reasons for joining a club. Clubs operating with the goal of educating their members will find that profits naturally follow. It is arguably more important that investment clubs provide members with the education and experience that helps them determine why the club's portfolio has grown, instead of simply watching their net worth grow. After all, if an investor has no interest in increasing their market knowledge, mutual fund investing or a full-service broker can probably provide them with reasonable returns 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.
The Bottom Line
Investment clubs are an excellent way to ease into investing without getting burned or ripped off by unscrupulous brokers. 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.
Also, one of the most valuable ongoing benefits of an investment club, especially for beginner investors, is the ability to have investment decisions analyzed by different points of view. If properly founded and maintained, investment clubs can yield their members excess returns on their investment funds year after year, while providing them with an invaluable educational experience that will last a lifetime.