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Investment Clubs: There's Strength In Numbers

01/26/01 12:02:47 PM PST
by Rachelle Waters

Are you awash in a sea of market data without any idea how to make sense of it, much less make a profit? Supported by a community of investors, you can learn how to invest and earn substantial returns.

If you're like most new investors, you're probably intimidated by the time and research necessary to put together a successful investment portfolio. After all, you have a lot to learn; you're probably not ready to risk big money. In fact, you may not have much money to risk. But here's how more than a million investors in 20 countries have conquered their trepidations: they're putting their heads together, pooling their finances, and forming investment clubs.

That's right, investment clubs. In case you haven't been paying much attention to the phenomenon, investment clubs are small, private organizations -- nothing more than a gathering in most cases -- in which a group of investors, usually novices, pool their time and resources to learn more than they could on their own about various forms of investments and then invest their hard-earned money as a group, although many club members also invest on their own.

If you're imagining a bunch of little old ladies around a doily-covered table, drinking tea and chatting about their nesteggs, think again. More than 35,000 investment clubs are registered with the National Association of Investors Corporation (NAIC), a nonprofit investment club organization. They can't all consist of little old ladies!

Investment club members are as diverse as the Wilshire 5000, but they all have similar goals. They all want to learn more about investing, they all want support from other investors, and they all want their money to grow. To meet those goals, families, coworkers, friends, people with no investing background, and even experienced investors are joining forces.


You've probably heard the investment advice, "Buy what you know." But many beginners feel they don't know enough to begin, and they're drowning in stockpicking suggestions. When you're confronted by a formidable array of financial information, it's hard to know where to start.

Investment clubs will help you tackle the research, because it is divided among the club members. Each member reports back to the group on his or her results. With 15 to 20 people behind you in an investment club, essentially, you're part of an analysis team dedicated to successful investing. To make sure everyone on the team evaluates stocks consistently, members follow specific investment objectives and guidelines, which they draft when they start the club.


Clubs are inclined toward long-term investing. The NAIC reports that club members tend to hold stocks for about six years. So for them, the buy-and-hold strategy seems to work well. The average NAIC investment club achieves 17.9% return on its investments and beats the market about 60% of the time. The NAIC's statistics are clear; when average people join investment clubs, they achieve better than average returns.

Those returns come as a result of careful planning, research, and commitment. That's one reason clubs succeed; they encourage members to develop sound investment habits. You can't buy or sell a stock without thorough research (even if you were to try, no one else would vote for it), and you can't buy or sell in the heat of the moment (you have to wait until the next meeting, allowing for plenty of time to think about it).

Clubs also motivate members to invest regularly. If you don't have much money to invest or don't feel comfortable investing large amounts, you should still set aside a little every month. You'll learn a lot in the process, and you can apply what you've learned when you have more discretionary money. Remember, even a small investment will grow if you contribute regularly and reinvest your earnings.

In fact, your money will stretch farther if you put it in a club account. Your conservative monthly investment of $25 (that's how much most club members contribute) won't go far on its own. Some brokers charge that much just to execute a trade. In a club, though, fees are divided between the members. Pooling your money won't increase your individual holdings, but it will decrease the fees you pay -- and lower fees eventually lead to higher profits.


Anyone who has served on a committee or worked on a team knows how hard it can be to coordinate people. Throw money into the equation, and it can get downright ugly. If you talk to investment club members, though, they'll tell you that meetings are more fun than frenzy. That's because clubs carefully organize and document  their procedures.  If you're thinking about starting an investment club, consider the following guidelines:

  • Agree on an investment philosophy. Otherwise, meetings could degenerate into heated arguments as members debate the merits of buy-and-hold versus active trading. Clear investment principles will also help potential members decide if the club is right for them.
  • Establish the rules. The club's bylaws should cover all the important points. How much money will members contribute every month? Will votes be equal or will they be weighted based on individual holdings? Will new members have to contribute a lump sum when they join so their holdings will equal those of longtime members? Iron out these details first, and you'll avoid confusion later.
  • Elect officers and outline their duties. President, treasurer, recorder (secretary) -- you'll need all the usual officers of an organization, but you should also create positions that meet the specific needs of an investment club. An education officer, for example, would schedule guest speakers and distribute helpful publications. A legal officer would make sure the club complies with tax law and other nitty-gritty aspects of cooperative investing.
  • Form a partnership. This is a little more sophisticated than the average investment club. Members of a general partnership share unlimited liability for the partnership's debts and taxes. For greater protection from personal liability, you can set up a limited liability company (LLC). Keep in mind that the legal organization you choose will affect your tax preparation, and you will probably have to pay some fees to establish and maintain the partnership.
  • Choose your tools. When it comes to managing your club, there's no need to reinvent the wheel. Take advantage of tutorials and accounting software designed for investment clubs., a website that helps clubs get started and organized online, offers free club accounting. The NAIC also offers accounting software that makes bookkeeping easy, developed by EasyWare Software.
  • Select a broker. Full-service brokers provide investment advice and financial planning, but their fees are high. Discount brokers have lower fees, but they don't offer as many services. And don't forget online brokers. Visit Investment Club Central for a survey that provides a comparison of online discount brokers (
  • Have fun! This is the most important guideline, whether you start your own club or join an existing one. (See sidebar, "Finding an investment club.")


For camaraderie and support, investment clubs can't be beat. Earnings are important too, of course, but the main benefit is educational. Learning to invest, like any other skill, takes time, trial, and error. Investment clubs take the sting out of the sometimes-painful learning process.


You may be surprised by how difficult it is to find an investment club. The obvious place to start searching would be the National Association of Investors Corporation (NAIC). Contact that organization, though, and you'll find they can't recommend a specific club.

To make matters more difficult, clubs can't solicit new members. That's because the Securities and Exchange Commission (SEC) states that "an announcement that a club is looking for new members might be considered a public offering." If a club makes a public offering, it may have to register with the Sec as an investment company -- definitely a process to avoid. (For more information on SEC regulations that may apply to investment clubs, go to its website,

People are looking for clubs, but clubs can't advertise, and the NAIC can't recommend specific ones. It takes some creativity to get around this conundrum.  Here's a hint. Think of all those job-search recommendations you've heard. Does the word network sound familiar? In this case, networking isn't just a good way to find a club, it's the only way. To start your search, you'll need a few contacts.
For a list of investment clubs by state:

For the nearest NAIC chapter:

Call the NAIC (877-ASK-NAIC). Although the NAIC can't recommend an investment club, some local chapters post lists of clubs that may be looking for members. You can   find a list of NAIC chapters at:

For a list of NAIC events, seminars, and workshops:

To connect with people who want to start a club:


Brown, Carolyn M. [2000]. The Millionaire's Club: How To Start And Run Your Own Investment Club, And Make Your Money Grow, John Wiley & Sons.
Maranjian, Selena [1998]. Investment Clubs: How To Start And Run One The Motley Fool Way, Motley Fool.
O'Hara, Thomas E., and Kenneth S. Janke Sr. [1999]. Starting And Running A Profitable Investment Club, Times Books.

Rachelle Waters

Title: Staff Writer
Company: Technical Analysis, Inc.
Address: 4757 California Ave. SW
Seattle, WA 98116
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