Investing can be daunting due to the plethora of options available and the potential to lose one’s money, but being part of an investment club can allay those fears.
Also, by pooling money together, members can see their collective wealth grow faster.
The success of an investment club depends on a variety of factors, but arguably, the most important is to have the right group members. Unlike savings clubs, which can be set up quite informally, investment clubs are primarily about creating wealth for the members and are thus slightly more complicated.
PSG Wealth stockbroker Amelia Morgenrood shared guidelines for investment clubs at the Moneyweb Expo on Saturday, saying that the relationship between the members of the club is very important, because investing is usually a long-term endeavor and thus requires that everyone involved is in it for the long haul. It is also practical to limit the number of members to reduce the administrative burden of the club.
“Ideally there should be eight to ten members,” said Morgenrood, “because if you want to meet up, which you should do quite often, it must be possible to gather in someone’s living room. Otherwise you have to rent a venue and that makes it more expensive, which defeats the purpose.”
When choosing members, Morgenrood said it is best to maximise the collective knowledge of the group. The more diverse their professional experience the better, because this will mean each member can contribute meaningfully to how the funds are invested.
Diversity of knowledge comes in very handy when debating which shares to choose, while certain skills are suited to running and administering a fund or setting up a company. Having a lawyer, or an auditor in the group, for example, would make the process much easier.
Said Morgenrood: “Setting up a company, I think, is the best investment vehicle, but it’s also very expensive. Remember, a company has to draw up financial statements every year, and they have to be audited. Companies also have to submit a tax return. And you don’t want to have to pay for those services because that would reduce the amount of money available for investing.”
Because it’s difficult to gauge someone’s commitment at the onset, Morgenrood suggested that members of the club be selected based on their investment goals. If all the members view the club as being critical to their retirement plan, for example, they are less likely to pull out at a later stage. Knowing the investment objective also makes it easier to choose the investment strategy, whether it will be property, stocks, or buying small companies. It will also make it easier to determine the monthly contributions and what members should be able to afford.
The volatile nature of stocks dictates that there will be days when the share prices crash, and it would not be useful to have members who want to pull out of an investment every time that happens.