Do’s and Don’ts of Starting an Investment Club

Here’s how to get on the right foot.

(Image: File)
(Image: File)

Investment clubs provide a great way to learn about investments and the stock market. Investing with a group allows you to gain new perspectives from others. In addition, investment clubs also provide buying power. Instead of investing $50 a month on your own, the group can collectively invest $600 per month, giving you more leverage in the stock market. Whether you’re new to investing or just want the support of a group, here’s what you should—and shouldn’t—do when starting an investment club.

Do meet regularly. Meet regularly, such as monthly, to discuss research. There’s a social benefit to meeting face to face, but many investment clubs today are also collaborating virtually using Skype and other online tools, says Laurie Frederiksen, chief operating officer of bivio, a company that provides Web-based tools for managing investment clubs online.

Do determine how much to invest. Investment should be small enough so each member can comfortably pay every month, but large enough to provide a substantial amount to invest. However, it’s not necessary for everybody to contribute the same amount. A member’s ownership percentage is determined by the number of units of stock he or she has purchased, so “what you put in determines how much you can get out,” says Dennis Genord, director of Education and Chapter Development for the National Association of Investors Corporation.

Do set guidelines for picking stocks. The NAIC recommends buying good quality growth companies as determined by its BetterInvesting’s stock investment methodology. To determine that, Genord recommends seeking small companies (revenues under $500 million) with a growth rate greater than 15%; medium-sized companies (revenues between $500 and $5 billion) with an anticipated sales and earnings growth rate of 10% to 15%; and large companies (revenues higher than $5 billion) with an anticipated sales and earnings growth rate of 7% to 10%. “These are companies that tend to grow consistently over time both in terms of revenue and earnings,” says Genord.

Don’t neglect high-interest debt and retirement savings. If you’re not saving enough for retirement or you have high-interest credit card debt, focus on those areas before joining an investment club, says Lanta Evans-Motte, a financial advisor at Raymond James Financial Services in Beltsville, Maryland. In fact, contributions to an investment club should be no more than 10% to 20% of your total investment portfolio, she adds.

For more information on how you can start an investment club, check out the National Association of Investors Corporation. The NAIC’s BetterInvesting website has online classes to help those interested in improving their investing skills. NAIC’s 90-plus chapters also have volunteers that can provide guidance on setting up a club.