Looking to start an investment club

Get the structure right, make sure it is watertight and that everyone buys into it

With an investment club you need to decide the rules before starting

With an investment club you need to decide the rules before starting

Tue, Aug 19, 2014, 01:10

A few members of my family and I would like to start a small investment club, as a project. There are five of us and initially we were thinking of investing €500 each.

We intended buying shares with the money or investing in a small cap fund.

None of us has much experience of financial markets other than what we read in the business section of the newspaper, but we would like to learn more. Would you be able to offer any advice as to which share company would be best for small investors like us and how to go about acquiring a holding in a small cap fund?

Ms LH, Louth Investment clubs used to be very popular but you hear about them a lot less these days.

There are a number of websites that specialise in this area, including ones that advise or organise such clubs – albeit at a fee.

There are also myriad books available, possibly in your library, covering some of the basics.

I am not a qualified financial adviser or broker and am certainly not in as position to advise on one stock over another.

But there are a few things you should consider. l Foremost is the structure of the venture – there is nothing like a row over money to tear a family group or friends apart. Get the structure right, make sure it is watertight and that everyone buys into it. Ideally get a simple legal contract put together. l Decide on the rules – is this a once-off investment or will it, more likely, involve regular contributions? Must everyone contribute the same or is there discretion and, if so, how is this reflected in returns? l Who decides on individual investments and how? Again, confusion in this area can lead to stress and rows. l Under what terms can people cash out? Will there be a limited timeframe to the entire enterprise? Can others join and on what terms? Inevitably some people will lose interest or have other commitments that require their attention. Don’t assume it will just “all work out”. l Be wary of the short term. The more people you talk to in investment, the more they tell you that the quickest way to spend/lose money is to keep jumping from one trade to another. I realise it is more exciting that way but, in financial terms, steady “boring” investments tend to deliver better returns, especially for the unsophisticated investor.

Markets are, and have been, very volatile in recent years. Get your timing wrong and you can get burnt. Over time, you have a better chance (but no guarantee) of these things evening themselves out. l Diversify – putting all your eggs in one basket (or money on one share) is asking for trouble. Try to spread the risk. You can do this by buying shares in different sectors and markets or, more easily, by purchasing funds that reflect such diversity.

The Irish Stock Exchange had a guide to investment clubs and how they work. I can no longer find it on their website but there is a copy here (http://iti.ms/1psHU7v).

It is dated 2000 so you would need to be aware that some of the contents – especially on tax and on the law – might have changed since then.

A final word of caution. My colleague Proinsias O’Mahony writing recently in these pages noted that most investment clubs tend to underperform the market.

He cited a study of 166 clubs trading in the 1990s which blamed, among other things, a tendency to “overtrade” ( trade too often) and an ill-advised preference for volatile growth stocks (younger, less established and stable companies which tend to carry a higher risk).

That same study – called Too Many Cooks Spoil the Profits – found that individual club members were more likely to perform better on their own as they would be less likely to be swayed by groupthink.

Any upside? Well, they do encourage saving and, as you indicate, help educate people about financial matters, which is always a good thing.

And, as with a book-club, if run well, they can be great fun, building friendships and entertaining. Just don’t expect to beat the market.

Send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara St, D2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.

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