These days you can find an organized club for every possible area of interest – square dancing, archery, golf, model railways, cars, astronomy, photography, bingo, collectibles, film and even travel – all of them fun and interesting recreational activities. But investing? Investing is a far more serious subject than learning to square dance. But yes, there are investment clubs. Several studies show them growing substantially in recent years. It seems that along with learning how to swing your partner, people are turning to clubs in increasing numbers to learn how to invest their money.
So, what exactly is an investment club? It’s a group of people who pool their money and invest together with the portfolio belonging to all the participants. Naturally, their aim is to make a profit, but more importantly, they want to learn how to be successful investors and feel more comfortable having the support of a group. The clubs that emphasize investing education seem to be the most successful and many participants will tell you that it is what they learn is extremely valuable. One story in the Wall Street Journal stated that over 60% of investment clubs produce annual returns over the lifetime of the club that beat the market. That’s nothing to scoff at.
Most clubs require small amounts to participate, usually from $20-$50 a month. Of course, the more members in the organization, the greater the purchasing power of the portfolio. Every member of the group, averaging a maximum of 15 people, brings different level of knowledge, experience and capability into the effort. Coupled with assistance from various organizations that support investment clubs, the group learns the ins and outs of investing and builds a joint portfolio over time.
You might wonder how this works from a legal perspective. The club is formed as a legal partnership, not only to address tax issues but to also protect the financial interests of all involved, especially if anyone wishes to leave the organization at any point, or new people want to join. There are officers, regular meetings and everyone must participate in researching stocks and companies. One member is appointed as the broker to actually make the transactions online once decisions are made. Some organizations provide the clubs with guidelines for operations, bookkeeping, taxes and more. You are literally in business together so the people involved should be those you know and trust. After all, this isn’t your normal club. This involves money, your money and everyone in the club is your partner.
Various agencies, including state departments of revenue and/or taxation, regulate various aspects of investment clubs. This makes it very important for the club to follow the regulations dictated by both agencies. It’s just not as simple as everyone pooling their money into a jar to bet on the winner of the Super Bowl. Therefore, it’s important to get the paperwork right and be thorough.
Make no mistake. This is also a commitment of time, money. Each participant needs to make a long-term commitment to this effort. Many investment clubs are quite successful when the members are committed and processes are followed.
As with everything, there are two sides of the coin. It’s not all about learning and making money. There are pitfalls as well. Not all clubs are successful. Not all clubs stay together. Not all clubs run smoothly. One of the most important elements to success is to choose partners, or members, for the club that have a similar investment approach with like-minded goals. If you can’t agree on that right from the start, the entire venture is doomed. Some may want to play the market while others are strictly buy-and-hold investors. That’s not a good match for a successful club.
If all the members do not participate equally (financially and the time to attend meetings and research stocks), then how can they expect to share equally in the proceeds? One of the biggest pitfalls that will destroy a club is not making sure that the financial breakdown per share (per participant) is spelled out fairly and clearly. That includes procedures for withdrawals, either partial or complete, by a member. The most successful ones use a unit-value system that divides the worth of the assets in the club by total units. The units each member owns are weighted by contribution levels so whenever a member might leave, they have a certain number of units in the portfolio. Depending on the value of the portfolio at that time, it is divided by the total units and the departing member is given the dollar value of their number of units (or shares).
The main investment principles that most clubs adhere to are to 1) diversify; 2) think long-term; 3) reinvest earnings such as dividends, continue to invest no matter what is happening in the market (i.e., dollar cost averaging) and 4) to invest in companies and funds that center on growth. These are sound investment principles that the most successful clubs follow. There are some, however, that focus on higher risk trading and faster growth, which is fine as long as that is what everyone has signed on for.
The type of club we have discussed is otherwise known as a group portfolio club where the group actively participates, contributes and makes decisions for the portfolio as a whole. It’s also a great way for a beginner who doesn’t have much money to start investing. The group dynamics of the club can be fun and provide investment discipline. The risk is lower because decisions are balanced between several people and groups tend to be more conservative in nature when it comes to investing than an individual. But there is another way to go in an investment club that is far less involved yet does provide learning opportunities.
Self-directed clubs are more of a coffee klatch approach where members share information on investment ideas and strategies, but ultimately, everyone applies that to their own investment accounts. This may suit some personalities and investing styles better but for many, especially beginners, a more structured approach with the group portfolio is preferred.
In many ways, this is like any other club, i.e. learning new things, meetings, a commitment to a group of people with a common interest, and even having fun. But as we said before, this is also about money. Your money. That requires a higher level of commitment than learning how to promenade or sashay with your partner. On the other hand, square dancing is the epitome of teamwork, all eight members of the square working together on each move as it is called out. So, if you are thinking of joining or starting an investment club, maybe the idea of the grand square, where everyone is an equal participant in the group’s success isn’t so far apart from that of the square dance club. If this is the investment choice for you, then choose your partners and do-si-do your way to investing success.
What does it mean to you? Investment clubs can be fun, provide you with an affordable route to invest smaller amounts of money and encourage investing discipline. They can also be problematic, particularly when the group begins to disagree and/or dissolve. Who you choose to invest with is critical. How you plan to approach investing in terms of strategy is just as important. If you start or enter a group portfolio investment club, exercise the proper caution but recognize there is a real opportunity to learn and make money. If you prefer the self-directed clubs, the only real risk is taking the advice of someone who may not really know what they are talking about. But that’s where your responsibility as an investor comes in. Research and confirm everything on your own before making any investment decisions.
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