What Is an Investment Club and How Do They Work?

Written by , August 3, 2012

What Is an Investment Club and How Do They WorkIt seems like trying to decide how and where to invest your money has never been tougher. There are so many different investment options to choose from, and even if you feel comfortable and confident in your ability to research potential investments, you’ll never have enough time to research more than just a small fraction of the possibilities. In order to make investment decisions by incorporating a broader range of opinions, some investors join investment clubs.

An investment club is simply a small group of people who pool their funds, and their time doing research on potential investments, in order to make joint investments in a commonly held portfolio. While many people form their own investment clubs with their friends, coworkers or family, it’s also possible to join a club that already exists.

Here’s some investing advice and information on how investment clubs operate.

  • Operational Basics. The typical investment club will tend to look and operate like a small business. (In a sense, that’s exactly what it is.) Members contribute funds that are pooled together and used to fund investments that the club has decided to make. The required contribution amounts, as well as the process for selecting investments, should be clear and well defined. Investment clubs schedule regular meetings where its members get together to their various investment ideas, and to make investment decisions.
  • Join a Club with Like-Minded Individuals. It’s important that the overall investment philosophy of any investment club you’re considering joining the somewhat in line with your own. If the members of a particular club tend to favor highly speculative investments in hope of a big payout, while you generally prefer more conservative investments, then that club probably isn’t right for you.
  • Participation and Action is Key. At its core, an investment club exists to invest. The educational benefits and research reports that members do are certainly valuable, but if the club seems to do a lot of research and discussion, but never actually invests money, then you might want to find a more active club.
  • Cap Your Investment. Because investment clubs involve a group dynamic for all investment decisions, it’s wise to cap your investment amounts to a small percentage of your overall portfolio so that you retain enough control over your funds. If a particular club would require you to invest an amount that seems too large to you, then look to find another club.
  • Know How to Leave. As your financial situation changes over time, it might become necessary to withdraw the funds you have with your investment club. Make sure you understand the process for doing so, and how long it takes to get your money back.
  • An investment club can be a great way to learn more about investing, as well as potentially earn a good return on the funds you invest. Because the process involves a number of other investors, however, make sure not to commit too much of your investment funds to a club.

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