Individual investing is as much a national pastime in America as watching baseball or barbecuing on the fourth of July. That being said, since everyone has to start somewhere, a place people sometimes look to first is an investment club. As with any investment opportunity, there are risks. Here are some pros and cons of joining an investment club.
First, let’s discuss what an investment club is and why you may be interested in joining one. Typically, a strong financial portfolio has some diverse assets. In other words, you invest your money in several different ways (e.g. IRA, buying a home, investing in the stock market) so in the event that the economy shifts and the value of a certain investment changes, you still have a sort of back up in your other investments.
As mentioned earlier, one type of investment is stock. The fluctuation of the market can make such purchases intimidating, so you may join an investment club to help spread the burden of that risk (and also increase the potential reward). Investment clubs are a group of people who choose to pool their money together in order to make a joint (and thereby larger) investment. Additionally, investment clubs may offer the opportunity for its members to gain more knowledge about the stock market as a whole and share ideas with other people looking to invest.
Pro: Wisdom of the Crowd
What better way to learn about something than by shared experiences and ideas? You may know a bit about the basics of stocks, the financials of companies and the brands you are interested in investing in, but there is still much more to learn. One of the biggest benefits of an investment club is the opportunity to learn and understand complex strategies like using stock options.
Pro: Spreading Costs
It can be nice to be able to spread trading costs across several people instead of paying the full costs yourself. Even though trading costs have dropped with many online brokerages lately, the costs still add up for frequent traders.
Pro: Social Interactions
Investment clubs are a great way to meet and network with like-minded people. Investment clubs aren’t all about money — working through the strategy and engaging with other people can be a fun experience!
Con: Fulfilling Regulations
You have to have a very high degree of trust with the people you’re getting into the club with, and you do have some methods of protection available like setting up a legal partnership or a limited liability company. Regulations have the potential to be vague or not all-encompassing, so there is some risk in joining up with strangers. Try to build or find an investment club with people you know and trust.
Democracy is great when you’re in the majority! But if you disagree with the direction the club is headed, you may be stuck participating in trades or going in a direction with your money that you disagree with.
Con: Breaking Up is Hard to Do
It’s very complex to wind down an investment club. This is especially challenging if only one person wants to leave. The problem is, throughout the experience, as stocks are bought and sold, there are tax liabilities. It becomes difficult to figure out who owes which taxes, and who shares which portions of the profits without some very rigid and complex rules up front.
There are some risks and few rewards associated with an investment club. Diversifying your financial portfolio through the stock investments can be a great way to improve your financial health. Whether you start tomorrow or in a decade, make sure that your dive into an investment club is well-calculated and part of your overall financial savings plan.
The information in this article is provided for education and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.