Have you ever considered joining an investment club? Two heads are better than one….right? Using that logic, 5 or 6 people (or more) must be a brilliant way to invest. Right?
Well……..joining together with others can have huge benefits. But there are some dangerous pitfalls to be aware of as well. Let’s take a look under the hood of investment clubs, shall we?
What is an investment club?
An investment club is just a group of like-minded people who share one common goal – to ultimately make money investing. The members of the club meet regularly and discuss investment ideas and decide how to invest their pooled assets.
It’s important for you to understand what “pooling assets” is. This means you each put in a certain amount of money and have shares in your investment club account. If the total contribution is $10,000 and you contributed $1,000, you own 10% of the fund. This is similar to how a mutual fund works. Not every club pools assets but most do. Those who do not simply meet to discuss investments and each member invests as he or she chooses. It’s important for you to learn how your club handles the capital. Let’s keep going.
What to ask before joining or creating an investment club.
The most important benefit of getting involved with investment clubs is the ability to learn about investing without being judged or taking much risk. This is especially important as the club just starts out. If the members are exclusively focused on making big scores in the beginning they will undoubtedly take too much risk swinging for the fences. The typical result of that is striking out in most cases unfortunately.
So if you decide to join a club, find out what the objectives are and make sure they track with yours. While you’re at it, make sure you understand what the investment approach is too. Some groups look for short-term wins while others invest for the long-term. Either approach can work – as long as the members agree. If this club invests in a way that is counter to your objectives, find another club.
Just keep one thing in mind, according to the National Association of Investment Clubs, the groups that plan on holding stocks for at least 5 years or more do far better than clubs that focus on shorter time periods.
While you interview clubs, ask how long they’ve been around. I would focus on those groups which have been around at least a year or more. If your club has survived a year it’s a good indication that it’s worked through its problems and could have a well-articulated investment approach.
Try to examine the attendance records at the same time. If nobody shows up to the meetings how are you supposed to learn anything? Make sure the meetings are well attended before signing up Pilgrim.
As a potential new member find out how the club handles it’s accounting. How are additional deposits handled? What about withdrawals? Rather than joining a club that has equal shares for all members, look for a club that provides unit values so people can add and take funds out. If the club gives unit values to members it’s far easier to have unequal contributions.
Bottom Line on Investment Clubs
If you are a novice investor, an investment club can be a smart way to go. I strongly suggest that you keep your contributions to a minimum. The main goal of being in the club is to learn – not to make money. In fact, according to NAIC almost 60% of the clubs out there don’t even match the return of the S&P 500. Still, it’s a wonderful place to learn about investing – and make mistakes where it doesn’t cost you much when you do.
Are you interested in joining an investment club? Have you ever been a member? What were your experiences?