Clubs give novice path to investing

Most groups meet monthly to study methodology, pool money to buy stock

Your Money

October 30, 2005|By CAROLYN BIGDA | CAROLYN BIGDA,TRIBUNE MEDIA SERVICES

No matter how much market news you watch or how many books you read, the best way to learn about investing is to, well, invest. But it's easy to feel overwhelmed when you first approach the market, and many of us lack the spare cash to buy individual stocks. That's why an investment club can be a good place to start.

Numbering in the thousands today, investment clubs are small groups (typically about 15 people) that meet monthly to study investing principles and pool money to buy stocks, sort of like a mutual fund. But in this case, members research individual companies, not a fund manager. Plus, contributions are modest, from $20 to $100 monthly, minimizing the risk while you learn.

Kenneth Janke, chairman of BetterInvesting (also known as National Association of Investors Corp.), an organization for investment clubs, says most new members have never invested. But after five years, they're often investing three times as much individually as in their club. "That just shows an investment club is a great introduction to the market," Janke says.

Unfortunately, finding a club to join is difficult. The Securities and Exchange Commission restricts groups from publicly soliciting new members. As a result, your main resource is word of mouth, often through friends and family. You also can learn of clubs by attending BetterInvesting chapter meetings (go to www.betterinvesting.org and search by ZIP code under the "Getting Started" link) or by posting inquiries on message boards, such as boards.fool.com/Index.aspx.

Once you've found a group, attend at least three sessions before you commit, says Angele McQuade, co-author of Investment Clubs for Dummies. She suggests asking these questions:

What is the investment philosophy? Make sure you're comfortable with the club's strategy for buying and selling stocks. See what companies are held in the portfolio.

Do you get along with the members? You'll benefit more if members are motivated and you're comfortable.

And do they have a mentor program? With an existing club, you may need help catching up to the investment level of the other members.

Because existing clubs have limited openings, it's often easier to form a new one with friends, family, co-workers and friends of friends.

A new club should outline an investment philosophy in writing, as well as operating procedures: Will checks be sent directly to a brokerage or first deposited in a bank account? What happens if someone doesn't pay?

For tax purposes, most clubs organize as a partnership, which means members pay tax on their earnings individually.

BetterInvesting provides sample partnership agreements on its Web site, along with more detailed instructions on how to set up your group. It also sells software to ease bookkeeping duties. Check out www.iclub.com and www.bivio.com for downloads, as well.

It might take a few years for everything to run smoothly, especially if member expectations differ. But with the right company and commitment, the benefits can be impressive.

Carolyn Bigda writes for Tribune Media Services.

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