Spreading the risk with investment clubs

Breaking into the investment world can be tricky when you’re still figuring out the difference between equities and derivatives. As a result, some people choose to ban together in an investment club so they can bounce ideas off one another and learn as a group.

The first investment clubs started in Western America, Texas during 1898 when investors were drawn to the idea of spreading the risk through group participation.

When the internet arrived, investment clubs became popular again. People saw it as an opportunity to grow their understanding of investments, which would later assist them with their individual portfolios.

What are investment clubs?

“Investment clubs are simply a group of people who pool their money in order to make joint investments, usually in stocks or bonds,” says Odetta Bodibe, financial adviser at Liberty.

She explains that they should be legally established as a limited liability company consisting of 10 to 20 members.

“Members meet once a month to discuss their joint investments, and rules regarding investment limitations are clearly defined – it is important to ensure that members understand and support the club's approach,” says Bodibe.

She points out that this type of investment is suited for those who are looking to invest long-term, for example a minimum period of 3 years.

“Withdrawal penalties might also be incurred by a member who wants to pool out of the investment early,” she adds. 

How to start one?

Eugene Maree, managing director of Wealthport, believes starting an investment club is as simple as rallying people you trust and have a common understanding with.

“With that said, sometimes it also works to have people with different personalities as part of one investment club,” says Maree.

“For example, including someone who’s risk averse and someone who has an “all or nothing” approach. This gives the group perspective on the various outcomes and scenarios that they may face when investing,” he explains.

However, he insists it’s key to partner with people with whom you share goals and objectives – regardless of size. 

What are the pros and cons?

“The great thing about investment clubs is that, by pooling together your resources, you are able to invest in larger investment assets that can result in higher returns in the long term,” says Maree. 

“In addition to this, what makes investment clubs more unique is that you are able to make more informed decisions about investments, given the varied opinions that come with investing with a dynamic group of people,” he adds.

Maree also believes investing in a group gives one a sense of assurance and guidance, since ideas and strategies are discussed and debated before an investment decision is made.

“While this is also considered a pro, the downside to investment clubs is that you can lose out on opportunities, given that you need to make investment by committee - which could delay the decision making process,” says Maree.

According to him, the core disadvantage to investment clubs is that you don’t have the flexibility to access cash in the event of an emergency. 

“This is why I often encourage consumers to look at investment clubs as only a portion of their investment portfolio – this certainly shouldn’t be your only avenue for investment,” says Maree.

Popularity in South Africa?

Investment clubs have over the years become popular in South Africa, particularly in the form of stokvels which has an estimated value of R49 billion.

A stokvel is a South African savings scheme where members contribute a portion of their incomes for a particular purpose or, similar to investment clubs, to benefit from interest earned on a lump sum.

Maree believes this shows how investment clubs enable consumers to create an alternative income stream for themselves.

“I do feel, however, that there is still an opportunity for younger people to get involved in investment clubs, as these are a fantastic way for them to get thinking about investments, and share ideas with like-minded people – ideas which they can apply to their individual portfolios,” he encourages.