Investment Clubs: The New Old-Fashioned Hangout

Remember investment clubs? Popular in the 1980s, they were a way to exchange knowledge about trading, back in the pre-internet days when getting information was difficult. Today, information is a mere click away, but investment clubs can still be a good way to learn about investing money and buying stocks.

Have Fun, Learn, Have More Fun

Chicagoan Lisa Arneson has been in an investment club since 2008. She and her friends initially started the club to learn more about the stock market, “especially because we just had the big crash,” she said.

They formed an LLP, get together quarterly, and have monthly dues of $75. They make buying decisions as a group. Initially the group was big on education, said Arneson, although it’s less so now because they’ve been together for nearly 10 years. But beyond simple investing, investing with friends can be fun. She also likes their brunches and the social aspect of getting together.

R. Brent Lang, vice president of international sales at Strategic Analysis Corporation, sees investment clubs as a great tool for the average investor.

“I like the idea of investment clubs. When open, unbiased information flows into investment rationale and strategy within a group, all members benefit,” Lang said. “No one is dictating all the decisions, but rather portfolio recommendations are based on merit and consensus.” 

The Consensus View

Jeff White, financial analyst at FitSmallBusiness.com, agreed.

“The best thing about an investment club is it gives someone access to opinions and knowledge of individuals that they trust, who are also putting their personal money into a potential investment. There’s a level of comfort in investing in something that others agree with you on,” he pointed out.

Of course, nothing is foolproof, and White said people who are thinking of joining or starting an investment club should know that decisions are usually made on consensus, so some individuals’ views may get overridden. People should also consider the financial obligation.

Eligibility, Compatibility

White noted that investment club members need to be on top of possible legal requirements. Although most clubs don’t need to be registered with the U.S. Securities and Exchange Commission, some do, depending on how they’re structured.

“Using an investment club could be good idea if you have like-minded individuals who can all discuss potential investments without fighting, and who genuinely don’t care how the votes go on investments. It also is probably for individuals who have a little bit of wealth, or who can make a decent monthly payment,” he added.

White encouraged people who start or join clubs to keep the emphasis on fun as they learn about investing and investment management.

“Use a percentage of the profits to do something interesting as an investment  group, like go a on special trip with your families. That could be a goal of the club, and once it’s reached, you could set a higher one,” he suggested. But setting higher goals doesn’t necessarily have to be for social events. 

Take It Up a Notch

There’s more to investing than knowing the fundamentals of buy and hold investing, various asset classes, and different market sectors. Once you’ve nailed the basics of investing for the long term, you may want to try some advanced concepts or add other products to your menu such as options, futures, or forex. There are plenty of opportunities to explore. Maybe you want to branch out into trading options with your stock investment group. You might start with options basics such as covered calls, married puts, and spreads. It might entice your investment group to learn about more complex options strategies. 

Maybe you have 100 shares of a stock and want to potentially add income to that position. What are your choices? Your club can open a paperMoney® account on TD Ameritrade's thinkorswim^® platform, which will allow you to place a simulated trade. Bring up thinkorswim on the big screen, order some beverages and finger foods and be prepared to spend a few hours exploring different positions you could potentially use.

For example, one basic options strategy is the covered call. To see how it works, select the Analyze tab, enter a stock symbol, and from the Option Chain, select an out-of-the-money strike. Then analyze a sell trade on a single option. The position will be added to your simulated trades. You can then select the risk curve to analyze the position (see figure 1).

How does it change your position? What’s the max profit, max risk, and the break-even point? Try this with different strikes and see how the scenario changes with different positions. Once your investment club has grown comfortable with covered calls, protective puts, and other basic options strategies, the group might consider branching out to the advanced stuff.

There’s no end to what you can do when making investing decisions. And when you do it with friends, it can make the journey more interesting.