Investment clubs: the welcome return

published 5 May 2017

Getting together with other investors is a good way to share knowledge and make informed investment decisions. Why not join in, says Lucy Loewenberg.

In the current low-interest-rate environment, many people are keen to invest in the stockmarket to boost returns, but worry that they don't know enough about stocks and shares, and that they can't win against professional investors who are "in the know". But in reality, many professional investors fail to outperform the market, while DIY investors may be able to draw on the wisdom of the crowd to make good investment decisions. Investment clubs loosely defined as groups of people who pool their money to invest in the stockmarket together can be a way into investment that is less daunting that setting out on your own, as well as more sociable and enjoyable.

Investment clubs bring together a variety of people, from friends and family members, to colleagues or new acquaintances. They tend to consist of five to 20 members who meet over a glass of wine at the pub once a month to discuss and collectively decide how to best play the stockmarket. They don't tend to be investment experts, but simply people who are interested in buying and selling shares, and their monthly contributions can be as little as £25. The process is democratic, as each investment decision is taken by a majority vote.

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Neil Ballard, 53, is an accountant in Cardiff. Once a month, he meets with his investment club, the "25-28 Club", which is named after Wales' Rugby World Cup victory over England. The club consists of his colleagues and friends, as well as clients. There are 16 members, mostly in their late 40s and early 50s nine men and seven women who meet at his office premises on a weekday evening. "We WhatsApp those who can't make it to the meeting," says Ballard, referring to the instant messaging service.

When the club was founded in 2015, members initially each paid in £100 per month, on top of a lump sum of £2,500 to start it off. "Now the fund has grown so well we have stopped contributing monthly. [We are] just reinvesting the returns and the fund is growing nicely," says Ballard. He adds that any members wishing to join must pay up for what their share would be by now. The club invests in companies on the American stock exchange, such as Nokia, Wal-Mart, BlackBerry, Skechers and Whole Foods Market; they recently sold their shares in Micron Technology. They look at external research reports about companies produced by research firm Value Line, but in their discussions they tend to "stay out of politics". Their motivation for being part of the club, says Ballard, is "to be financially free, as you won't get returns like this in the bank".

When asked about why people choose investment clubs over investing by themselves, Ballard says that actually they "have a lot of active members who trade on the their own, as well as bringing their knowledge to the club". But the draw of joining an investment club is that you can benefit from the knowledge and opinions of several people. For Ballard, investment clubs bring diverse characters into the mix. Every person who joins the group is required to take a course on investing as well as a "colour character" test. "We had too many yellows' at one point," says Ballard, "they're very fast-paced and creative, but nothing got done." Now, the characters of the club's members are better balanced.

Investment clubs were hugely popular in the UK and US in the 1990s and early 2000s. In the UK, there were some 10,000 in 2001, and in the US their popularity reached unprecedented heights, with an estimated 11% of American adults being part of a club by the late 1990s. Their numbers declined drastically throughout the dotcom and financial crises, but now it seems they may be experiencing renewed interest once again. In 2016, twice as many investment club accounts were opened as in 2015, and the first quarter of 2017 has been the busiest in five years on stockbroker the Share Centre's platform, which has about 2000 investment clubs on its books.

If you are looking to join an existing investment club, some of them look for new members on the ProShare Investment Clubs website. But, as many clubs are formed by a group of friends or colleagues, it might be difficult to get involved unless you already know a member. If you become a member of an existing club, you also won't have the chance to set out its rules and objectives. Therefore, it may be best to find five or six people who are interested and start your own club.

When setting up an investment club, it is sensible to establish a constitution and rules. Typically, this should include the level of monthly contributions, as well as how often and where the club will meet. You should agree on your risk level and goals, how much time you wish to dedicate to the club and how often you plan to buy and sell shares (as this will have an impact on trading costs incurred). Then, decide what the election procedures are for the chairperson (who ensures meetings runs smoothly), the treasurer and the secretary. Each investment could have a "champion" who keeps track of its progress. It is also important to think about what to do when members leave or if the club is wound up.

The Share Centre, Hargreaves Lansdown and TD Direct Investing offer accounts for investment clubs, with varying charges. Once you've set a club up, the treasurer should notify HMRC. At the end of the tax year, the treasurer should provide each member of the club with a statement on any dividends paid out, and any profits or losses made, so they can declare this to the taxman. Note that HMRC taxes investment club members on an individual level rather than the level of the club.

"Most individuals will have found in the last year that their capital gains and dividend allowances cover the income generated from an investment club if it is their main or only investment asset (ignoring Isas)," says Alistair Cunningham of Wingate Financial Planning. "But with dividend allowances expected to fall to £2,000 next year this might start to be more problematic on those with shareholdings of £50k-100k or more." "It makes sense to place restrictions on how and when members can leave, and how their pot is valued," he continues. "A sensible rule could be, for example, [that] the first month following notification is used for values. But there can be liquidity issues, so, saying that, there could be a month before the shares are sold and they are paid off." Cunningham also recommends ProShare's Investment Club Manual, which can be ordered online, as a reference tool.

The social aspect is the biggest benefit of being part of an investment club, says Graham Spooner, investment research analyst at the Share Centre. Most clubs have a tendency to keep aside part of their investments to fund social events throughout the year, he says. "We know from previous conversations that these range from going out for lunch, theatre trips, wine tasting experiences and even trips abroad together!... It's unsurprising therefore that lifelong friendships have been formed courtesy of investment club membership. At the end of the day, this is a group of people that have similar interests and aspirations."

At the same time, diverse membership of varying ages and from all walks of life should be encouraged, so that members avoid group-think and are able to contribute a broad range of knowledge and ideas, not only about different companies, but also about broader societal and political trends. Professor Brooke Harrington of Copenhagen Business School surveyed over 11,000 club members in the US over eight years. One of her most interesting findings is that those investment clubs with the best investment returns tend to be the most mixed in demographic terms. Consistent with social psychological research, she found that informational diversity in relation to the sources of ideas about investment opportunities led to better financial performance.

Another key factor influencing clubs' performance is to do with how they recruit members. Clubs formed around family or friendship ties in Harrington's study had considerably less dissent and therefore worse results than clubs whose members were connected by more distant, workplace ties, where opinions were more varied. However, she also found that because workplace ties tend to be shorter-lived than those based on friendship, clubs made of like-minded friends tend to stay invested for longer.If you're looking to start up your own investment club, you might want to stock up on the wine.