Investment Clubs Welcome Profits but Focus on Education

by Monica Steinisch

Dow Dames, Propeller Heads, Blue Chip Posse, Fortune 8 Players … If you guessed that these are rock 'n' roll bands you'd be way off. Rugby teams? Not even close. These colorful names actually belong to investment clubs--groups that make learning about the stock market fun and, often, profitable.

More than just a forum for buying and selling securities, clubs offer the opportunity to share knowledge and exchange tips. Particularly for beginners, the friendly, supportive atmosphere makes financial education far less intimidating than it might be in a formal classroom setting. While stock market success is certainly welcome, investment clubs stay focused on the ultimate goal of learning. Most participants also enjoy the chance to catch up with friends each month.

The National Association of Investors Corporation (NAIC), a Michigan-based nonprofit organization that provides information, instruction, and tools for member investment clubs and individuals, reports that it now has an estimated 28,235 investment clubs with approximately 293,018 members.

Though membership has declined along with the stock market, those who have stuck it out still find participation in an investment club rewarding.

"You can always learn something, whether you're in a bull market or a bear market," says Pat Hunt, a member of the Women's Investment Network club in Anchorage, Alaska. "These are the times that teach you how to survive in any market."

Sue Larsen, a founding member of Diablo Valley Women's Investment Club in Northern California reports that her club hasn't lost any members because of the bear market. "Instead of looking for performance right now, you have to stay focused on education. It will make you even stronger for the future."

How investment clubs work

Typically, investment clubs are made up of 10 to 20 people--big enough to distribute the club duties so that no one has to put in too many hours during the month, and still small enough for members to get hands-on investing experience.

Because of the nature of these clubs, with participants making financial transactions as a group, members are actually partners, with a legal partnership agreement in place.

Every club sets an amount, which might be as low as $25, that members contribute each month toward a pool used to purchase stocks. (If the club is a member of the NAIC, there also will be nominal club and individual membership dues each year.) If the club operates on a unit value system, like a mutual fund, there may be a provision allowing members to skip a month if they want to.

When it comes to choosing companies to invest in, the club may choose to follow the NAIC's stock selection guide, rely on the price-to-earnings (P/E) ratio, or employ some other less scientific approach that uses intuition, observation, and experience. Whatever method is favored, the club should have agreed upon guidelines for when to buy and sell.

A typical club meeting lasts about two hours and will include an update from the treasurer, a review of current investment performance, a discussion of potential investments, a vote on buying and selling shares, and a presentation about a particular investment topic.

Nancy King, president of the Alaska chapter of the NAIC, explains that there also is a social aspect of club membership that "is necessary and enjoyable, but needs to remain secondary to the primary goals of learning and investing." To foster that social atmosphere without disrupting club business, most clubs plan a special social event or two during the year and encourage friends to catch up before and after regular meetings.

Though most clubs have comparable goals and a similar meeting format, every group sets its own by-laws and ascribes to a distinct philosophy. The result is that there can be subtle, or even major, differences in how clubs operate.

For instance, some groups purchase bonds, real estate, or other investments rather than stocks. To avoid any surprises, ask lots of questions about a prospective club's goals, procedures, rules, and requirements before you join.

Should you join an investment club?

You're new to investing. Clubs provide a fun and nonintimidating forum for learning about the market.

You need structure to keep on track. Consistency is key for successful long-term investing, and club membership is a great way to make sure you invest every month.

You want to diversify your investments. Clubs make it possible for members to spread their investment dollars among more stocks than they likely would be able to as individuals.

You have free time and a desire to contribute to the club. Plan to devote two to 10 hours a month to reading financial publications like The Wall Street Journal, preparing company research for discussion, or fulfilling the duties of a club officer.

You like the social aspect of an investment club. Although the monthly agenda may cover a lot of ground, meetings aren't necessarily all business.

"A good club member understands the commitment required and agrees to carry his or her part of the load," stresses Kathleen Shay, vice president of education for the San Francisco chapter of NAIC. Her club's by-laws have a provision for voting out a member that doesn't pull his or her weight.

Investment club membership may not be right for you if:

You can't make a long-term commitment. A club runs more smoothly and successfully when all the members are in it for the long haul.

Your other commitments leave little or no time to take on additional responsibilities. Almost all clubs require members to track portfolio performance, research investments, make stock recommendations, and serve as an officer at some point.

You would have a hard time seeing your money invested in stocks you might not choose yourself. Since clubs make buy and sell decisions by voting, you will undoubtedly be on the losing side now and then.

If you believe that club membership is for you, you'll need to find a group that is both a good fit and open to new members. Many clubs, including Larsen's and Shay's, require prospective members to attend three meetings to make sure they are compatible with each other.

Online clubs, which conduct all or most of their meetings on message boards and via e-mail, can be an attractive option if you live in a remote area or simply prefer discussing P/E ratios and the NASDAQ Composite while wearing your fuzzy slippers.

Before committing to any group, be sure you understand its philosophies. For instance, if you are only willing to invest in "socially responsible" companies, then it wouldn't do for you to join a club whose holdings include tobacco and liquor companies.

If one club doesn't seem to be exactly what you're looking for, try another. With so many choices, from the Masked Investors to the Market Moguls, you're bound to find a club that's a perfect fit for your investing style. Ask at your credit union if professionals there know of investment clubs you may be interested in.

September 15, 2003