Several readers have had questions about investment clubs. They are coming from both beginning investors, who hope they will learn by joining one, and more experienced investors, hoping that a club will allow them to show their stuff. The answer to both questions is, “Yes” — beginning investors can learn a lot in a club and the more sophisticated can increase the breadth of their investment action. But not all clubs are created equal. Some function better than others, both for learning and for investment success. Here’s a guide for choosing a club or even starting one.
Investment clubs are surely the most enjoyable way to invest your money, and they can offer an investment education as well. Most are private groups of 15 or at most 20 members, who pool their resources to invest, usually buying stocks but sometimes also bonds and more exotic investment instruments. (Subsequent posts will focus on different investment vehicles, explaining what they are and how to buy and sell them. A recent post on stock basics began that process.)
Clubs typically organize themselves around a community, a church, a synagogue, an adult education center, or even just a neighborhood group. They require monthly payments (which can range upwards from $20) into a common fund. They meet regularly, usually twice a month, to discuss investing and consider sell and buy decisions.
Most clubs appoint or elect officers to establish an administrative structure along these lines:
- A president who sets meeting dates, plans activities, and runs discussions.
- A vice president to fill in for an absent president.
- A treasurer who controls the club’s brokerage and banking accounts and places all buy and sell orders
- A secretary to remind members of meetings and keep complete minutes. This last function is critical. Investment discussions can become complicated. Because not all investments work out as well as others, it is essential to know which members said what and when — not to assign blame, which would surely destroy the club, but to learn from past mistakes.
- A “director of research” or “education officer” who distributes research material among members, perhaps invites guest speakers, and arranges field trips to broker presentations, for instance, or even the headquarters of a firm in which the club has a stake or is considering one.
If there are no clubs in your area, you can establish one. Make sure the members are compatible. Investment discussions inevitably involve disputes, and it is crucial that members know how to handle these in a productive manner. It is also important that at least some members have investment experience beyond sometimes reading The Wall Street Journal or The Financial Times. Actual experience in an investment firm or a broker would be ideal.
During the 2008-09 financial crisis, many clubs lost a lot of money and disbanded, experiences that left behind much disillusionment. But there is nothing inherent to clubs that makes them more vulnerable than any other investment arrangement. (Many professional investors also lost a lot of money during the crisis.) The best approach is not to dismiss the idea of clubs but rather to ensure that the ones you join maintain clear guidelines on how they invest and how they control risk. These guidelines can limit losses even in the worst of times and even blunt, if not completely eliminate, conflict among club members. Guidelines might include:
- Procedures to receive new members and for members to withdraw their funds.
- To determine when the club will reinvest dividends and interest payments and when it will distribute them among the members.
- Which newsletters and research materials the club will use and at what interval it will reconsider these subscriptions.
- The establishment of risk guidelines up front that:
- Insure adequate diversification among different sorts of assets (of which more in subsequent posts) the club should determine the maximum proportion of the club’s assets that it can hold in a single stock or bond. As a rule of thumb, the upper limit should seldom exceed 5 percent.
- Determine exactly what sorts of investment vehicles it will and will not use — stocks, bonds, foreign securities, real estate, and the like. (More on each of these in coming posts.)
- With an eye to controlling losses, how much volatility or loss it would tolerate in any holding before reconsidering it. (Some clubs set an automatic sell, called a “stop-loss order,” when a holding reaches this point.)
Guidance on best investment practice for clubs is available from umbrella organizations. The largest is Better Investing, www.betterinvesting.org. It claims five million investors. For a small fee per club member, your club can join Better Investing. It will offer training and educational material, considerable investment research, discounts on subscriptions, and the ability to buy general liability insurance, which could become desirable as the assets involved grow. The Securities and Exchange Commission (SEC) also has information on investment clubs at www.sec.gov/reportspubs/investor-publications/investorpubsinvclubhtm.html.
You might also seek more general and in-depth investment insight at ProsperAmerica. You will find its website at www.prosperamerica.org