From the pen of Karin Iten…

Dear Investment Academy Reader,

Investing can be a thrill-a-minute ride. But it takes guts to ride out the volatility and hold onto your winners. That’s the scenario investors are currently facing as we head into what could be a pronounced double dip. And while you might be tempted to hide your head in the sand and your money in the bank, this isn’t your best option.

Instead, take your emotions out of the investment process by getting a group of friends together and start an investment club. Never thought of that? Well, today I investigate the benefits of investing this way and show you how to set up a successful (and safe) club.

What is an investment club?

Investment clubs are the unsung heroes of the investment world. According to PSG online, “an investment club is the coming together of people who want to actively participate in both the research and decision-making process of investing money”.

But why do people join investment clubs?

Why would anyone want to do this? you ask. Well, not only does it work out cheaper for each member to invest this way, but the evidence suggests that collective investment decisions based on discussion and democratic choice are more likely to produce sustained profits. After all, no one cares about your money more than you do. And that means when it’s on the line, no one will do more to make it work than you will.

The answer is a multifaceted one and it underlines the benefits of being in an investment club perfectly. Here are the top four reasons (and benefits):

1.    Education:
Few ordinary investors have a formal education when it comes to picking shares and running a successful portfolio. But by pooling together your knowledge, brainstorming ideas and subjecting every decision to the scrutiny of other club members, you vastly improve not only your own investment expertise but also your success. Plus, if you’re a novice investor, they’re a great way for you to learn about effective strategies without putting a large amount of your own funds at risk. 

2.    Diversification:
Because your club consists of members from all walks of life – lawyers, accountants, doctors and many more – each of you brings a unique breadth of investment experience and knowledge to the group. This means you’ll not only have a wide variety of opinions on a specific share selection, but you’ll be confronted by a wide spectrum of risk profiles too. That’s great news if you’re either too risk adverse or too gung-ho because it means you’re likely to adopt a more balanced approach than you ordinarily would.

3.    Low risk:
As a general guideline, your club should consist of between 10 and 15 members – regardless of age, background or investment experience. When you start, each member will be required to pay an initial joining fee, which you’ll agree to at your first meeting. Since you’ll use this amount to open your club’s broker account, you must ensure this adds up to at least R10,000. After that, each of you will be required to pay a set monthly contribution. By pooling together a relatively small amount of money each month, you limit the risk of being wiped out if the market goes against you.

4.    Social:
Being part of an investment club turns a solitary pursuit into a social one. And since two heads really are better than one, it makes agonising over hard investment choices much easier than deciding on your own.

How to get started...

According to investment website Motley Fool, at your first meeting, you need to:

*** Agree on a regular meeting time, place, length and format for future meetings.
*** Determine how your club will be organised. This means you’ll have to agree to what responsibilities are involved and elect members to take these responsibilities on. (Typically, you’ll need a president to preside over meetings; a vice president; a treasurer to deal with the buying and selling of shares, as well as handle the funds; and a secretary to keep minutes and do the admin.)
*** Find common ground regarding your investment approach, philosophy, strategy and outcome. You’ll need to figure out, for example, if you’re investing for the long haul or looking for short-term, explosive profits. You’ll also need to decide whether you want to invest in, for example, only high dividend payers or penny shares or whether you’re willing to take a more holistic approach to your portfolio.
*** Come to a formal agreement to protect each member in case the relationship turns sour. You can do this by either forming a partnership or a close corporation (CC). One of the most important documents your investment club will ever own is its Partnership Agreement. This document is a binding agreement that outlines the rules and conditions of how the investment club will conduct its business.
*** Create a share selection watch list. This is a list of the shares members are investigating as possible “buys”. And since each share will have to go through a strict review process (in accordance with the club’s objectives, investment approach, etc.), this will help the club choose what to invest in and what to avoid. 

There you have it. Now that you know how you’ll benefit from being part of an investment club, it’s time for you to start working on the details. For an in-depth step-by-step report on how to make yours a success, download your free report here.

Here’s to your financial freedom

Karin Iten
for the Investment Academy