In Da Club: Starting an Investment Group

I keep a running list of life skills that I think every well adjusted adult should have, and ranking fairly high on this list is a basic understanding of investing. For many people, the markets can be quite intimidating and foreign, but basic investment and financial literacy is key to ensuring that you manage your money wisely and plan properly for the future. Sure, you can rely on the expertise of others, but without understanding what’s going on you have no way of knowing if you’re being taken for a ride- and you probably are.

Regardless of whether you’ve never before invested a penny or if you’re a veritable Scrooge McDuck, an investment club offers an opportunity to learn more about investment while pooling resources and skills. A larger pot of funds gives more investment options (and can be more efficient, given commissions), and the process of researching and debating the merits of individual stocks and investment strategies in a group is one of the best ways to grow your money brain. It’s also a great excuse to drink Scotch on a Monday night.

I’ve been in an investment club for about 2 years, and it has been an interesting experience to say the least. We haven’t reached our goal of world domination and gold grills yet, but we have learned a thing or two. Here are a few tips for starting your own club:

1. Find a good mix of people - The first step in setting up a club is to find people- an investment club with just one person isn’t actually a club, it’s just a sad guy watching a stock ticker. Opinions vary on the optimal size for an investment club, but our group of 10 works fairly well. Any more than 15 would probably get unmanageable; any less than 5-6 might defeat the purpose of having a club in the first place.  Ideally, you want people with similar situations and goals, but you don’t want a group that’s too homogenous, as people with different backgrounds can offer unique perspectives. Our club has a lawyer (yours truly), a couple of engineers, an accountant and some bid-ness guys, a doctor, an IT geek, and a dude who I’m pretty sure deals drugs. This eclectic mix makes for some interesting discussions and facilitates research into different sectors. It’s also a great setup for a joke of some sort- “A lawyer, an engineer and a drug dealer walk into an investment club meeting…”
2. Decide how much - Once you’ve got your group together, you need to decide just how much money you plan to contribute. Anything less than $25a month will make it difficult to build up an investment kitty. $50-$100 per month is probably a good starting point, as it allows you to have enough money to make investing worthwhile without requiring too much of a commitment. There’s nothing to stop you from increasing this amount over time, or even making larger one-time contributions for specific purchases. If you all lose your jobs and end up on the welfare, you can cut back as well.
3. Define your strategies and goals- One of the most important issues to discuss before you kick things off is the investment strategy and goals for the group. Risk tolerance varies greatly- some people want steady but secure growth, others are more speculative in nature. You may also want to discuss generally how you plan to allocate your investments, both in terms of distribution between sectors and markets. This has been perhaps the biggest issue with our group- we lack a clearly defined strategy. Each meeting sees a mishmash of stocks being pitched and debated without any real sense of how these investments would fit into our overall plan beyond (hopefully) making bags o’ cash. We got nailed much harder than we should have in the recent market crash because we were very heavily invested in Canadian resource and energy stocks, some of the companies that were hardest hit. It was a textbook example of enthusiasm and groupthink overriding common sense and solid investment principles.
4. Put everything in writing- Okay, got the basics of how your club is going to work and what you want to do figured out? Now paper it like crazy, says the Money Grubbing Lawyer. You’ll want to develop a good, comprehensive constitution to govern how the club runs and how decisions are made. This is an area where you really don’t want to skimp- your little club may not seem like much of a big deal right now, but in a few short years when there are hopefully tens of thousands of dollars invested, you want to make sure that the rights and obligations of all members are crystal clear. There are some great sample constitutions available, and your brokerage may even have a preferred form. In any event, there are certain things that need to be covered, including:
   • The amount and frequency of contributions;
   • Club officers and their duties;
   • When meetings will be held and how they are to be conducted;
   • How decisions will be made and how disputes will be settled;
   • How tax issues will be addressed and what members will claim;
   • When and how members can leave the club; and
   • Provisions for dissolving the club.
5. Get pickin’ - With the formalities in place and your group ready to go, it’s time to start working towards those goals. Before you randomly pick a few stocks and dive in, spend your first month researching and debating. Remember, one of the big benefits of an investment club is the collective knowledge at your disposal, so use it. You may want to have each member present a case for a certain investment choice and then discuss. It’s quite useful to have members circulate their proposals a few days before the meeting so each person can conduct independent research as well, as this allows for an informed and lively discussion, or perhaps a shouting match and pistol duel to settle disputes.
6. Don’t stop learning - The exciting part of an investment club tends to be the stock picking and watching that portfolio grow, but it’s easy to fall into the trap of focusing just on investment options and neglecting broader financial education. In addition to stock picks, focus a portion of each meeting on learning about a new investing concept or strategy. You may want to dedicate some time to learning about technical analysis, interpreting financial data, asset allocation, or taxation issues. Pick one person each meeting to research and present on an educational topic, or recruit a guest speaker knowledgeable in a certain area. You may also want to develop a group reading list on money topics. The key is to not let the investment club become just about numbers, but to instead ensure that members are actually getting some benefit beyond a common pot of cash.

 

Any other tips for those looking to start an investment club?

 Photo by Kanou Hiroki.

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