Clubs with capital ideals

Rules: An investment club can educate its members about investing, but heed advice to avoid common pitfalls.

Dollars & Sense

October 28, 2001|By Jennifer Dorroh | Jennifer Dorroh,SUN STAFF

When investing, it's not timing the market, but time in the market that counts, according to Maryland's investment clubs. If you've been thinking about starting your own club, members advise, don't let the current plunge in the stock market scare you away. There's no time like the present to invest, they say.

"We don't go into our meetings and sulk just because the market's down," said Therese Maguire, who founded the Baltimore Bull-ettes, a club whose investments had a 44.5 percent growth rate last year. "No matter what the market's doing you still want to learn. And when it's down it can be an opportunity to buy at lower prices."

Investment clubs usually consist of about a dozen people who pool money each month to invest in stocks as a group. Although they all hope to make a profit, the first priority of most clubs is to learn how to research stocks so members can invest their own money.

If you're ready to pool your mental and financial resources with friends to start your own club, the National Association of Investors Corporation (NAIC), a trade association for investment clubs, and local club members have this advice:

Choose members who will do their part.

Starting an investment club - and keeping it running - takes work. Each member will need to spend a few hours every month researching stocks and must be ready to report back to the group.

Keep it small.

For many groups, keeping membership down to about 15 makes things simpler.

Pick members who work well together.

When money is involved "it can be touchy," said Joyce Spittel, vice president of the Maryland chapter of the NAIC and member of an investment club."

Consider joining an investment organization.

Many Maryland clubs belong to the NAIC, which gives member groups specific guidelines for starting and maintaining investment clubs. The organization's Web site is www.better-investing.org.

Educate yourself.

Before you decide which stocks to buy, learn the basics of investing and how to evaluate companies, members said. There is a wealth of information online and at the library, and the Maryland NAIC offers courses through adult education at community colleges.

Draft a partnership agreement.

"An investment club is a business," Spittel said. "You have to have a legal contract signed by every member forming a general partnership."

Choose a broker.

Clubs must trade through an investment firm, but it's up to the members to decide how much involvement they want with a broker. Many trade online.

Set ground rules.

The partnership is the foundation, but the club's operating procedures are the building blocks that specify how members will run the club. These might include what days members will meet and how much each will contribute.

Create checks and balances.

The Bull-ettes assign two members to the task of keeping track of the group's finances.

"It's a good check so that no one can run away with all our money," Maguire said.

Decide on an investment strategy.

Long-term growth or short-term speculation? Fundamental or technical analysis? Members need to learn about investment strategies and agree to follow the same one so they'll be working together.

Do your homework.

Members research each stock in the Bull-ettes' portfolio. Most keep abreast of developments online, at sites such as Yahoo!, AOL and Quicken.

Start with a small number of stocks.

Choose just five or six stocks in the beginning. If the club's portfolio has too many stocks, it will be tough for members to stay informed about all of them while they are still learning.

Diversify.

"You don't want your portfolio to be all in one industry because, if that industry takes a downturn, your whole portfolio takes a downturn," Maguire said.

Invest regularly, no matter what the market is doing.

Most clubs require members to invest a set amount per month.

Don't cash in those dividends and capital gains.

Instead, reinvest your money in new stocks, club investors said.

Be patient.

It takes two or three months to set up an investment club, so don't expect success overnight.

Said the Bull-ettes' Maguire: "You can't come in thinking you're going to make a lot of money right away. But you are going to learn how to invest."

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