Why not start an investment club?

I have always said that while investing is not rocket science, it does take time to understand all the ins and outs of stock markets and stock selection. In truth we never stop learning, but that initial learning curve is steep.

Tackling investment collectively is one way of reducing that learning curve – which brings the idea of investment clubs to mind.

Investment clubs were a big theme during the dot-com boom but seem to have faded away over the last decade or so, yet they have a number of advantages for the individual investor. The ability to pool cash resources potentially reduces transaction fees, as each transaction can be larger, while more money means a wider range of shares can be bought, equalling diversification.

Broadly speaking, an investment club consists of a group of people looking to learn and create wealth by investing in the stock market. Practically, they will make regular contributions to a joint fund, while deciding together about what to invest in.

Some words of caution about investment clubs

When any group forms, rules are required. The initial excitement of working towards a common goal could wear off quite quickly, so you need to ensure that ground rules that have been agreed upon by all members are firmly in place.

The process starts by forming a partnership – a simple yet legally binding agreement between a group of people. The partnership will have a constitution, which includes rules regarding the roles of members belonging to the partnership.

The chairperson will run proceedings and a vice-chairperson could also be appointed if the group is large. The responsibility of each member needs to be clearly defined from the outset and it is the chairperson’s responsibility to make sure all members are fulfilling their duties.

The treasurer is responsible for ensuring monies are paid, while the trader will carry out the transactions as agreed upon by the group.

In order to keep a record of decisions made, a secretary will need to be appointed.

Finally, a member needs to be assigned to monitor the financial operations of the group in order to make sure all is running correctly – an internal auditor, if you will.

The money side of the operation is of course the most important; not only in terms of contributions, but also withdrawals. Contributions need to be agreed upon not only in terms of amounts and when they will be paid, but also in terms of other issues such as members wanting to raise a contribution or take a payment holiday.

What if a member wants to withdraw money from the club?

Here you need to make sure everything is very clear. I would suggest that withdrawals are accepted given a clearance period of one to three months.

The clearance period protects the club from being forced to sell immediately in order to raise cash. Another way of managing this is to always keep a percentage of contributions in cash, say 5%; a member can then withdraw 5% immediately and the balance would require a waiting period.

It is important to keep a record of growth and each member’s holding. I always unitise the portfolio so everybody’s holding value is easy to calculate (I will write a separate column on unitising a portfolio).

Lastly, you need to find a group of people and this is often easier than you’d think. Ask around at work, your friends and family or try Twitter and Facebook. Ideally you’d want four to 10 people and finding a group of that size with a couple of hundred rand to invest every month shouldn’t be too hard. Set regular meetings and start the process of learning and investing and perhaps even more importantly, having fun. 

This article originally appeared in the 24 September 2015 edition of Finweek. Buy and download the magazine here.