Why an Investment Club Could be the Ideal Way to Gain Some Much-Needed Stock Market Know-how

I recently set out to explore investment clubs, thinking they must be everywhere.  What could make a topic as potentially intimidating as the stock market (to someone with zero experience) any more inviting and pleasant than an evening with trusted friends, talking shop, maybe even over a glass of wine? But how wrong I was. When I reached out to an extended network of women near and far, no one, it seems, is involved in an investment club, as lively and informative as they can be. 

This is ironic, given that it is more important than ever that women take an active role in managing their finances. According to a Pew Research Study, women’s income grew 44% from 1970 to 2007, and 22% of women are out-earning their husbands. Women’s tremendous earning power only underscores the importance of knowing how to handle their own finances.

A lot of emphasis is put on debt management and eradication. But then what? Brian Krause, Certified Financial Planner and principal at Gupta Wealth Management in San Diego, has some very clear advice:

• Cash Flow Management: “If there’s more coming in than going out, your investments won’t have to work nearly as hard,” he advises. “People spend way too much time agonizing over the daily balances of their accounts, and not nearly enough time on cash flow.  Since you have a lot more control over cash flow, that’s where the focus should be.”
• Hire a Financial Adviser who Accepts Fiduciary Responsibility.  “A fiduciary has a fundamental obligation to both act and provide investment advice in the very best interests of their clients,” explains Krause.
• Not all Debt is Bad. “In my opinion, bad debt is when you borrow to buy depreciating assets – credit cards, car loans, etc.  Once you have paid off bad debt, however, you may want to consider income-producing real estate, stocks and bonds.”  

How Investment Clubs Can Help

The best way to take an active role in your financial future is to deepen your understanding of the world of money. Unfortunately, women as a group have a long way to go here. According to a 2012-2013 Prudential Research Study, women are very aware that they lack knowledge of financial products, with 45% saying they are either “not very knowledgeable” or “not at all knowledgeable.” That same study plainly states “women’s level of financial responsibility within the household has outpaced their investment confidence.”

The good news/bad news is that women are making more money than ever, but we don’t always know what to do with it. We all know the way to grow our money extends well beyond the traditional savings account, and there is some real money to be made out there, if you know what you’re doing (which we’ve already established, many don’t). So, we’re back at the investment club concept. It presents an ideal means to education in a non-threatening environment, with the added bonus of sharing the burden of education.

A February 2013 Wall Street Journal article discussing investment clubs assesses membership in this type of group declined to roughly 39,000 in 2012. That’s 10% of what it was estimated to be in 1998, and less than 1% of that other kind of club (5.7 million Americans belong to a book club). Why? The article’s author, E.S. Browning, claimed that one reason may be that stocks simply “aren’t any fun anymore; they are scary.” But isn’t learning about volatility part of the education? 

Club Option #1:  Make Investment Learning Fun and Sociable (Yes, It’s Possible)

And, in fact, the value of these clubs in today’s financial climate is even more indisputable. When my friend, Leslie, found herself inheriting some money and knew she needed to learn more about the world of finance – immediately – her advisor even recommended she join an investment club as part of her personal financial education. What she found was a great group of like-minded women who respected each other and shared the same goals. “It was really helpful to share everybody’s ideas. It was fun,” she says.  While the proceeds truly were all for fun — with the group using their investment proceeds to fund trips and parties for its members  —  the education was still very real.

The San Diego Union-Tribune recently showcased an investment club of a different kind: a small group of wealthy women whose sole purpose is to generate funds in support of the local opera. While their goals didn’t exactly originate from financial need, the importance of understanding investing was not lost on these self-proclaimed “Dow Divas.”  One member is quoted saying that she felt that her friends “should at least be able to know enough to judge their advisers’ performance on their portfolios,” and believed that an investment club was an ideal, approachable means to that.  To their credit, this year these Dow Divas have been able to donate $500,000 to the San Diego Opera with the club’s proceeds.

Clubs also have the advantage of utilizing members’ personal experience to inform each other and as a supplement to research. If those in the club belong to multiple professions or have a wide range of interests, they can familiarize one another with sectors they might otherwise neglect. For instance, in Leslie’s case, one of the women in her group recommended they buy into a little company she was working for called Idec. Now known as Biogen Idec, the company’s stock has risen from about $45 five years ago to over $300 today.

However, it’s not always going to be a home run like Biogen Idec. In fact, Krause warns against attempting to beat the market or find the next Google or Tesla, two current market darlings. The key goal here should always be education. 

Getting Started

So, how to begin with this daunting task?  Creating an investment club can be as simple or complex as you desire. Sites like Betterinvesting.org and Bivio.com offer numerous resources to assist with creating and managing a club.

If you choose to create a group on your own, Krause has a few suggestions:

• Cap membership to roughly a dozen members to ensure everyone actively participates, but the amount of information distributed at each meeting is manageable.
• Agree on dues, and how they should be structured to fund the account.
• Open an investment account that offers research, so information is always available to all members. Be sure to investigate tax liabilities if going this route. You can find more detailed information here: http://www.bivio.com/website/file/Public/starting-an-investment-club-business-general-partnership-llc-corporation.html,  or from your own investment advisor.
• Meet monthly to review and share information, make recommendations, and vote on any action.
• Assign every member “homework,” where each member chooses either a stock or fund based on their own interests, or is assigned one of the S&P’s 10 different sectors, to ensure a breadth of information.
• Choose one member to decide how to allocate investments by sector so your account is diversified. 

Club Option #2: Go it Alone, with Some Savvy and Help from Others

If pooling your money with friends either doesn’t appeal to you, you don’t want the complication of the tax work that goes along with setting up a partnership, or your friends have differing amounts to invest, you can instead structure your group as an “information-only” entity.  It then becomes a friendly forum to research and share knowledge, which you can use as a launching pad for your own decisions and investments. This method might help sidestep any strife, should members disagree on steps to take, and can even contribute to some friendly competition — where members can share their successes based on how they used the information the group pooled.

While the Prudential study admits that “The financial services industry clearly has work to do to support financial education, and help women take action toward financial empowerment and a more secure retirement,” wouldn’t it be great if we empowered ourselves to take charge of our own education too? And while we’re at it, also help our friends to be better, more informed financial decision-makers? A girls’ night in might just get a lot more valuable!