Money: Investment Clubs

Investment clubs don’t get the press they did when stocks boomed in the 1990s. But they still offer a wonderful opportunity for new investors, young or old, to dip a toe into the stock market and learn how to invest in stocks.

“…it’s a wonderful thing to be a part of when you meet with folks who really just want to do better for themselves.”

“You’ve got a group of people who are interested in doing something together in such a way that they’re trying to benefit each other’s personal financial situations,” says Dennis Genord, director of education and chapter relations at Better Investing, a non-profit which provides mentorship and assistance to investment clubs. “And it’s a wonderful thing to be a part of when you meet with folks who really just want to do better for themselves. A lot of folks want to do this to create generational wealth.”

Investment Clubs: a good idea?

“Investment clubs are good way for like-minded people who have an interest in investing can come together to learn and pool their resources.  Later, when they get ready to make individual investments they have a better understanding on how to go about making investments, and how to choose stocks,” says Theodore Daniels, a president of the Society for Financial Education & Professional Development (SFEPD).

How Investment Clubs work

• A group of friends, colleagues or family members forms a club. Daniels says they can establish a brokerage account at an investment company such as Charles Schwab, E*TRADE or Fidelity. “I helped a family in North Carolina get started,” he says. “They wanted to learn about investing, but they didn’t want to do it by themselves. So, they came together as a family. About six family members set up an investment club.”
• The group decides which stocks to invest in and how much and how often each member would contribute. Each member might pay $25 or $50 a month.
• Genord says he has seen groups as small as two people and as large as 20 or 30 members. “It works as long as the group of people have a good chemistry,” he says. “Imagine bringing 20 to 30 different personalities into a room…and get them to all agree on one thing? That can be a very big challenge for clubs.”
• A managing partner is selected from the group and a partnership agreement is signed by each member. The managing partner is the one who will actually execute the trades.
• The group will also need to get a tax identification or EIN (Employer Identification Number) which you can do online with the IRS. “A lot of our clubs are general partnerships,” Genord says. “They’re legal entities. These aren’t just groups of people getting together. They are actually forming a business.”

How investment decisions are made

Daniels says one option is to have each member choose a particular industry. “For instance, you may have one person say I’m going to do research on technology stocks. Another person does research on cruise ship stocks, another person says I’m going to do research on health care stocks,” Daniels explains.

Membership in an investment club offers for its members both an opportunity for social interaction and financial literacy.

“At the meeting, they report out what they found.  For instance, they’ll say ‘I found this one company has a history of making profit, it pays dividends, leadership comes up with new products that are going to be hot,’” Daniels says.  “They have a basis for their recommendations to the group.”

Make sure the research is done using legitimate sources of information, according to the SEC.  Learn more here. 

Social interaction and financial literacy

Membership in an investment club offers for its members both an opportunity for social interaction and financial literacy.

Daniels, who once belonged to an investment club, says it’s a learning experience – but you are also around like-minded people. “We always enjoyed being with each other, talking about stocks and bonds and mutual funds, and sometime having some food to eat. We looked forward to it.”

“But,” he adds, “this is financial literacy as well because it’s a learning process.  You’ll be able to maximize the available resources that you have. I always say money doesn’t mean anything if you don’t know how to use it and get the most out of it.”

“It’s all about learning,” Genord agrees. “It’s all about getting folks comfortable. The ultimate advantage of this whole thing is that members can, on their own, build the confidence to do it themselves – to actually open up a brokerage account of their own,  outside of the club. And then they can really start to invest more serious amounts of money.”

Scam Alert!

If you join an investment club online – or communicate via any social media platform, the FTC has a warning for you about scams.  Special targets are anyone interested in crypto or bitcoin, as is the case here –  and immigrant communities or groups bound by a specific language or culture. Learn more here.

• Use www.BrokerCheck.finra.org to check if a broker is a licensed or if someone has complained about them.
• Read about and understand any investment before you give someone your money. Ask for information in writing. Use the EDGAR database (www.sec.gov/edgar/searchedgar/webusers.htm) to research investments and investment companies.
• Get the name and company information of the salesperson offering an investment. Research the salesperson and the company before investing.
• Always look into investment firms or salespersons with “senior certification” or who claim to be retirement consultants.

Want to amp your financial savvy? Learn about Senior Planet’s “Money Matters” talks and other resources here. 

Your Turn

Have you or are you in an investment club?  How is it working for you? Let us know in the comments!

Rodney A. Brooks is the former deputy managing editor/Money at USA TODAY. His retirement columns appear in U.S. News & World Report and Senior Planet.com. He has written for National Geographic, The Washington Post and USA TODAY. The author of “Fixing the Racial Wealth Gap,” Brooks has testified before the U.S. Senate Special Committee on Aging. His website is www.rodneyabrooks.com.

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