For many younger investors, the idea of joining an investment club can see quite old fashioned; an outdated relic of a simpler time and a simpler stock market. Just hearing the term investment club conjures up scenes of a group of old guys sitting around and lamenting not buying more shares of Coca-Cola or McDonald’s stock back in the day.
While there is some truth to this view, and investment clubs certainly are not as popular as they once were a few decades ago, joining a club (or starting one) can still be a useful piece of your overall investing strategy.
What is an Investment Club?
I should probably lay a little foundation first. What exactly is an investment club? Well, the SEC defines it as follows:
“An investment club is a group of people who pool their money to make investments. Usually, investment clubs are organized as partnerships and, after the members study different investments, the group decides to buy or sell based on a majority vote of the members.”
While this definition is a good starting point, it misses two key components that really make joining an investment club worthwhile.
First, it is about more than just pooling money. That may be a fundamental mechanic of how clubs operate, but it’s also about pooling intellectual resources, research efforts, and diverse backgrounds and experiences. Investing together with the right group of people can add way more value than just increased capital, although that is a perk too.
Second is the part of an investment club often goes overlooked, but is arguably the most important. That piece is education and continued learning. No matter your level of investing experience going into a club (although clubs are generally more suited for novice investors), there will be the opportunity to learn something. Whether it is details of a new company, new industry, a new analytical method, or even a new investment vehicle completely, you can always take away something from your investment club experience and apply it to your own portfolio.
Why Investment Clubs are Still Relevant
I imagine some of you are probably thinking, “If investment clubs are on the decline, why should I waste my time?” It is true: brokerage costs are becoming negligible, powerful stock research tools are widely available online for free, robo-advisors are investing on our behalf, and Millennials are more averse to the stock market than previous generations. All these forces work against the need for investment clubs. This is more than just Motley Fool stock picks, where individual investors receive guidance about stocks to buy.
But even in this fast-paced, digital age, there are benefits to participating in a club.
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As mentioned, a huge upside to becoming a member of an investment club is the ability to access a pool of resources. Splitting up the work of researching new investments and tracking your existing portfolio holdings allows for deeper analysis and more eyes on all of the group’s work.
There is definitely a benefit to more capital as well. With combined contributions from all of your members, more cash does open up access to additional investments that you may not be able to easily afford with your own investable money. Things like higher priced stocks, real estate, and more may be on the table sooner as your club grows.
Diversity of a Group
Another key benefit to making investment decisions collectively is the power of diversity. You may be highly knowledgeable about a certain company or industry, but you have the opportunity the team up with experts of different backgrounds. By combining your perspective with those of your investment club partners, you can jointly form a better-rounded point of view, and hopefully make better investing decisions.
We covered this in our revised definition of an investment club, but it is worth repeating; the continued learning and practice you can get participating in a club will help you become a better investor on your own.
If you join a club with a solid and trustworthy group of investors, they are not likely to let you slack when it comes to contributing money or making quality stock recommendations. Having the support of a group can help you to develop discipline when it comes to research and investing regularly, which will benefit your own portfolio as well.
How Can an Investment Club Fit into Your Broader Investing Strategy?
While partaking in an investment club can be a valuable (and potentially lucrative) experience, it should complement your personal portfolio & savings, not replace it. As with any investment, there is the risk that you will lose money in an investment club. Also, by picking individual stocks, as most clubs do, your club will incur more brokerage fees and be less diversified than if you just invested in a low cost index fund.
When making the decision to participate in an investment club, be sure to consider your other financial objectives. Your own retirement savings, personal portfolio, and emergency funds should be prioritized first.
To truly get the most value from your investment club experience, you should attempt to apply your learning back to your own portfolio. Whether it’s a new analytical technique, insights into a different industry, or even purchasing quality stocks recommended by the club for your personal portfolio, there is a lot to gain by joining an investment club today.
By Sean Sirianni
Sean is the CFO and co-founder of Sneaky Falcon Enterprises LLC, a 10 member investment club that has been actively investing since December of 2015, and recently launched a website to share their own investment club journey with the internet.