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Things To Consider When Joining An Investment Club

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The official definition from the Securities and Exchange Commission (SEC) dubs investment clubs “groups of people who pool their money to make investments.”

Investment clubs also typically allow their members to fund larger portfolios, educate members about investing and also help them to become more market-savvy.

Investment clubs have been around for decades, and actually, in 1998, for example, there were over 400,000 Americans who were proud investment club members. However, according to the Wall Street Journal, that figure has catapulted southward—and shriveled up by about 80 percent.

Post-Recession nervousness and overall mediocre stock market performance may have a lot to do with the answer to the question about our average Joe and his potential to make mega-bucks with his investment club.

Yet that really doesn’t necessarily mean it’s impossible to make money in an investment club. Furthermore, it’s more about encouraging each other in the act of investing.

How To Join An Investment Club

You can find an investment club chapter on your own by going to betterinvesting.org, the National Association of Investors Corporation, simply by typing in your zip code on the far right hand side of the website.

Of course, I had to try it myself. When I typed in my zip code, out spit the name of my local club, the Heartland Chapter. An event popped up: “During the coming year, we will be offering several classes and special events in different locations to serve the BI (assuming that stands for Better Investing) community. We will also offer some online classes. Visit our web page frequently to learn about educational opportunities.”

However, I don’t know these people, and I’m not sure I want to walk into a meeting full of strangers. Therefore, I can understand your hesitation about joining an association like that when you’ve never met the members.

Ask Around

It’s also possible to see if your city or town has locally existing clubs. Ask your co-workers, HR office, etc. (Some workplaces may have already-created investing clubs in place and the location would be really handy for you if it’s right in your office break room.)

It’s a great way to have an open invitation from you to your co-workers, friends, family and other acquaintances who have a passion for investing.

How To Start An Investment Club

The best thing about starting your own investment club is that you can decide how basic or advanced you want your club to be.

However, if you’re all sharp day traders, then you can fill each other in on which trading platform has the best charting (or whatever topics you’d like to discuss) and ultimately, make each other better. If you’re somewhere in between (for example, you may know the difference between forex and options, and that’s the extent of your knowledge) then you can adjust your club to fit that particular skill level.

Assuming you already have people for your club, you also need to establish:

  1. Shared goals. Unify yourselves and agree on your purpose. If you’re planning on long-term investments, for example, you all need to agree. If your club is planning to pull out all the stops to be successful short-term investors, then you need to be sure you’re all in it together. Otherwise, your club may spend more time arguing about “what to do next” and less time honing on in the goals you should have already established.
  2. A supportive, understanding leader is vital in promoting cohesion and optimism within the group. It’s important to make sure that someone in your investing club can do these things well. After all, this is different than an Ultimate Frisbee club. You’re working with people’s money—which is a totally different ball game—and adds a completely different emotional component.
  3. Speaking of money, you’ll need financial contribution from each club member. Decide how much you want to charge for a membership fee, as well as how much each member should contribute financially. Are there minimum monthly contributions? Figure out the financials up front, and be very clear what happens to members if they don’t meet expectations.
  4. To make sure club members understand risk. No investment club is impervious to risk. No individual, for that matter, is, either. It must be understood that risk is shared amongst everyone in the club. It’s also important to discuss how comfortable each club member is with different levels of risk. If half of the club is only comfortable with low risk, and the other half wants to dive in head first, a bigger conversation needs to be introduced. Also, if you begin investing and suddenly, a club member is not okay with the level of risk you’ve agreed on down the road, I strongly suggest deciding as a group what you’ll do.
  5. File paperwork. You’ll need to apply to the IRS for an Employer Identification Number (EIN) and file a Certificate of Conducting Business as Partners form with your local jurisdiction. You should also write out your general partnership as well as a club operating agreement as well.
  6. Open a brokerage account and invest, making choices together. Don’t forget to evaluate your investments often. Remember to go back to the shared goals you agreed on in the very beginning of the infancy of your club.

College Investment Clubs

The potential for college or university clubs is awesome. Typically, these types of clubs have other goals besides just making money, including networking.

Think about it. A bright group of college students visit an alum in his office on Wall Street. This alum, as it happens, is looking for an intern. If one kid singles himself out of the bunch, plays his schmooze cards just right—well, then, everyone benefits.

An internship in the back pocket, plus some actual, real ROI investing experience. College investment clubs definitely use real money and get real investing experience. In fact, that’s the highlight for most club members.

Some college investment clubs into some serious business. For example, the University of Delaware’s Blue Hen Investment Club won’t let anyone into their exclusive club without a resume and interview.

It’s run by an executive committee on top of a faculty advisor. The club has its own class, and that’s not even the most impressive part. The Blue Hen Investment Club is running an investment fund with $1.8 million under management. These are students!

Mount Mercy University, which is literally two hours down the road from my house, takes field trips to the Chicago Board of Trade and also leaves campus every year on a trek to Omaha to attend Berkshire Hathaway’s annual shareholders meeting.

If you’re in college, the best time to get involved in an investment club is now. If your college doesn’t have an investment club, start one.

Your student involvement office (the department at your college typically in charge of student organizations) should be able to get you started on the process of creating a new club or organization.

Online Investment Forums

If you’re not looking to pool your money with anyone else, or you’re just looking for a group who has the same passions as you—and you don’t mind if you’re not in the same room with a living, breathing human being, then maybe an online investment forum is right for you.

A few options:

StockTwits: A financial communications platform for the investing community, StockTwits allows traders and investors to keep tabs on the market through a social media platform. The price tag is even better: it’s completely free to use. The app tries to gauge market sentiment based on rankings of each stock and encourages beginning traders to get involved and learn more about trading.

Reddit: /r/FinancialPlanning is a place to land if you’re interested in a message board with posts directly related to investment education. Reddit is a social media, social news/discussion site and is moderated by the individuals on it, who can “upvote” and “downvote” any comments they like or don’t like.

Google + Communities: Thankfully, Google saw the need for excellent discussion forums and created extended circles where individuals can join a variety of communities. Investing categories are part of these Communities—and they have moderators. (Hurray! No spam.) There is some real value that can be found if you’re intent to join an online investing community.

Be forewarned that on some of these sites, dialogue on each platform can become crowded and tough to wade through to get the “golden” nuggets of information.

Pitfalls

To some people, the idea of an investing club may be akin to a group of co-workers chipping in for the jackpot. (As in, they’re never, ever, ever going to win.)

It can possibly be like that. If investment club members aren’t dedicated, have strict goals and rules, and know what they want, it’s possible they’re like a herd of cows dispassionately grazing on grass, not sure what they’re doing and why.

A lot of investment clubs are born during bull markets and dissolve after a few rounds in the boxing ring with the ever-powerful stock market. Here are some potential pitfalls that can wreck your investment club even before it really gets going:

Herd mentality. (You’ve heard this term before, in social psychology 101, and it’s a major pitfall in investing in general.) It’s when people are influenced by their peers to adopt certain behaviors, including chasing stock market trends. This is why it’s so important to have balance in the group—and to be able to recognize what is a trend and what is a genuine possibility for excellent returns.

Warren Buffett’s wisdom always prevails in this situation: “Be fearful when others are greedy, and be greedy when others are fearful.”

It gets boring. Any investor worth his or her salt knows that investing, if done really well, is often really boring. For example, index funds are a great long-term investment. However, how much fun is it to plop money into an index fund and then do… nothing at all? Not very.

Sometimes, investors have an image of their investment club investing in a single $10 stock and then selling that same stock for $10,000 a month later, before the next monthly meeting. It’s really important for all club members to understand the nature of the market and understand what typical returns average in the stock market. Hot stock tips, while way more exciting, may not match what the original club goals and agreements were.

Disagreements amongst club members. Again, be absolutely sure your members understand the risks. Be sure they understand the club goals. It’s okay for people to ask questions, and make sure things are going in the original direction. However, if a member isn’t happy with his ROI or doesn’t know why he joined in the first place… Well, all that can happen, because, again, it’s not an Ultimate Frisbee club.

It might be helpful to list some other strategies for your investment club’s success:

Tread carefully. These happen to be the same strategies that individual investors follow every day, with lots of success. Here are just a few, and if you Google search this same vein of advice, you’ll find other ways to invest intelligently besides these. They’re elementary, but bear repeating one million times over:

Spend some time doing research. Great research done by all members of the group should always be done before investing—in anything. And remember, if you can’t explain how a business works, or your group cannot for the life of itself figure out what a particular company actually does, or produces, don’t invest in it.

Don’t try to time the market. Please don’t. Warren Buffett doesn’t. So that means your investment club shouldn’t either.

Keep emotions out of the picture. It’s tough. But your leader should be prepared to teach a unit or bring in someone who can teach your group about that very topic, because often, there’s nothing more powerful than fear and greed when it comes to money.

Diversify. Think about having a broad portfolio, with lots of different asset classes and types of funds. It lessens risk, big time. It’s important to remember that conversation about what each group member is comfortable with, risk-wise.

Think big picture but be realistic. I can’t help but quote Warren Buffett. He’s said before, “Earning more than 12 percent in the stock market is pure dumb luck,” then you’d better believe it.

Enjoy yourself

We questioned whether he could really make a lot of money investing with an investment club, and as with anything else, it depends.

It depends on the drive of the organization’s members, the overall organization skills and leadership qualities of the club’s head honcho, whether the investments are monitored well, the strategies the members employ to ensure they’re investing like they should be.

All of that matters. Despite the fact that there are a few major cautions when opening or joining an investment club, ultimately, it’s more about encouraging each other in the act of investing.

There can be something really wonderful about encouraging each other, trading information, learning together, some members offering suggestions that others may not have thought of, and the list goes on.

In general, the world of investments can present tricky and unnavigable waters. To have a group of people who are passionate, like Joe, about investing is worth giving an investment club a shot.

If you’ve started or joined an investment club, let us know about your thoughts below. Thanks for reading and happy frugaling!

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