Investment clubs have been around for several decades and are simply groups of people who get together and pool their money to invest. While the primary motivation is to make as much money as possible, clubs are also a great way for investors to share ideas and learn about the market from others.
This article explores the benefits of investment clubs and how you can go about finding one.
The Benefits of an Investment Club
You can think of an investment club as a small-scale mutual fund where decisions are made by a committee of non-professionals. In fact, an investment club can be established as a legal entity, either as a legal partnership or as a limited liability corporation, making its framework similar in principle to that of a mutual fund. Best of all, an investment club avoids the often burdensome management fees that all mutual funds levy on their unit holders - fees that can have a significant impact on the overall return provided by mutual funds.
But the benefits of an investment club come with a major caveat: the returns (or losses) that the club realizes entirely depend on club members and their abilities to choose the right investments for their pooled funds. When we purchase mutual funds from the major fund companies, we are effectively purchasing the education, experience, skills and discipline of the mutual fund managers entrusted with our money. When we join an investment club, we are attempting to replicate (and improve upon) some of those management attributes, but in a non-professional setting.
A typical investment club will meet on a regular basis (usually every month) to review its existing portfolio and to take suggestions from club members regarding new investment opportunities. The monthly meeting is an open floor, where each club member is able to voice his or her opinion about the suitability of new investments and other concerns regarding the performance of the pooled funds. Unlike any mutual fund, the investment club is a true democracy. Here, the collective wisdom of the club members, combined with information they've gathered through intensive research, serves (in theory) to produce the best investment decisions.
How to Find an Investment Club
By law, investment clubs are not allowed to recruit members because it could be viewed as part of an investment scheme. This means that the onus is on you to approach a club.
BetterInvesting, formerly known as the National Association of Investors Corporation, is the pre-eminent advocate of collaborative investing. It maintains extensive archives of information for starting and maintaining investment clubs.
BetterInvesting advocates four simple principles that apply as much to making excellent individual investment decisions as they do to making democratic decisions in a club setting:
- Invest a set amount regularly.
- Reinvest earnings, dividends and profits.
- Invest in quality growth stocks and equity mutual funds.
- Diversify your investments.
These principles are very much in keeping with a buy-and-hold strategy, characterized by low portfolio turnover rates.
The Bottom Line
There are clear benefits to the discipline and decision-making typical of investment clubs. By maintaining a strict regimen of regular meetings, investment clubs force individual investors to adopt an active investment style, in which portfolio review is ongoing and investment decisions - whether to buy, sell or hold - are constantly made.
Furthermore, the decision-making power of the investment club resides in its democracy. Each member brings his or her own education, experience and skills to the group, all of which are used to their fullest when evaluating and debating a decision. The power of the investment club comes from the collective talents of numerous individual members.