Are you tired of your investments being pillaged by institutions, but lack confidence to “go it alone”?  Why not form an investment club?  It’s fun, educational, and (potentially) profitable.

Many people lament the fact that their hard-earned savings are being subjected to mediocre performance and high charges, courtesy of financial institutions.

On the other hand, whilst unit trusts often carry lower charges, and of course there is always the option of investing in one of the Satrix exchange-traded funds, somehow these investments do not carry the same involvement that can come only with investing yourself.

You may have thought about starting your own equity investment portfolio, but somehow felt that you lacked the capital, time, and knowledge required to make a decent go of it.  If this is you, why not look at starting an investment club?

What is an investment club?

In its simplest form, an investment club is a group of like-minded people who contribute a fixed monthly amount into a pool for investing.  In addition to such structures providing access to larger amounts of capital as a result of the number of contributors to the pool, each member can investigate a different sector of the market for suitable share investments.

What’s more, the regular meetings that such clubs have provide a great deal of social benefit, as members discuss existing and potential investments.  Since meetings are usually held in an informal setting such as the home of one of the members, an investment club provides members with an opportunity to unwind and relax – not to say that discussions around markets will not become heated at times!

Advantages of participating in an investment club

Joining an investment club has a number of advantages, as can be illustrated by the following example:

Joe Soap has about R500 per month that he wants to put into starting up an investment portfolio.  Assuming that for the first year he decides to put this money into a call account, he will have about R6 200 (including interest earned) with which to unleash himself on the investment world.

Suppose too that during this time, he starts researching a couple of shares that have potential, and decides that with banks being relatively undervalued, Investec Ltd looks like a good buy.

Unfortunately, with Investec Ltd trading at around R92 per share (as at 13 June 2019), Joe will only be able to buy about 65 shares.  What’s more, he will not be in a position to diversify his portfolio.

Now if Joe can find nine like-minded friends, each with R500 per month to contribute, by following the same strategy (i.e. investing in a call account for the first year) the group will have R62 000 with which to start their portfolio.

The group will also have more time and ‘brain power’ as a collective than what Joe could muster on his own, and through the sharing of ideas, might decide that Absa Group Ltd is a better prospect at R174.

An investment of 100 shares in Barclays Africa will cost around R18 000 (including dealing costs – using an online platform will bring this down significantly), leaving R44 000 available to invest in three or four other shares and leaving a little cash in the pool.  Such an approach is likely to provide decent returns at a far lower risk than investing the entire pool in just one share.

Potential pitfalls

No organisation is ever without its bumpy roads, and investment clubs are no different.  The following are some things that you need to watch out for:

  • Personalities:  Whilst diversity is the key when it comes to sharing ideas, there must be sufficient commonality amongst the members if any progress is to be made.  If half the group favours a “buy-and-hold” strategy, whilst the other half consists of died-in-the-wool day traders, there is likely to be much volatility and very little investing.
  • Administration:  Unless you want your club to resemble a boxing match, it is vital that good records are kept.  Your group should therefore try to include an accountant amongst the members.  Accountants are not only useful for counting the beans, but can also do some of the grunt work when it comes to analysing financial statements.  They are also useful as the “designated driver” when the celebratory red wine starts flowing after one of the shares reaches a new high.
  • Agreement on an exit strategy:  The purpose of an investment club is to build up a reasonable-sized portfolio that will generate superior returns over time.  It is therefore important that the members agree on when and how a member will exit the club.  Whilst it is understandable that a member may want to cash in part of his investment if there is a family health crisis, relations can become strained if certain members want to make withdrawals at inopportune times.
  • Legal:  Verbal agreements, whilst legally binding, are often worthless when it comes to disputes, and the ugliest disputes often arise when money is involved.  Given that it is not inconceivable for a group of 10 members contributing R500 per month to build up a million rand portfolio in five years, the R1 000 or so in legal fees in ensuring that you have a properly drawn-up contract is surely money well spent?
  • Authorities:  Building up and managing a portfolio will require some trading activity, and someone will also need to manage the funds that are building up in the bank account.  It is a good idea to designate a couple of members as the persons authorised to transact on behalf of the club.  If everyone starts ‘phoning brokers on a whim, the result will be chaos.  To ensure that other members are kept in the loop, present all documents at each meeting.
  • Taxation:  Let’s face it – whenever there is money to be made, you can be sure that the long arm of SARS is never too far away.  However, your activities will determine whether you are traders or long-term investors, which will affect how you are taxed.  The form that your club takes (i.e. partnership, company, etc.) will also have a material impact on the tax that you pay – particularly when it comes to Capital Gains Tax.
  • Audit:  Here he goes again – bean counters!  Actually, having a regular audit of the club’s records is a good way to keep the members on the “straight and narrow”.  If you are an investing club (as opposed to traders), the volume of transactions should be reasonably low, and thus the audit fee should not be too prohibitive.  Having an outside, independent person check out your books each year should provide peace of mind to all of the members that things are being done properly.  It is suggested that your legal agreement include a requirement for regular audits.

Finally, whilst it is desirable to make money, having fun and becoming educated is as important.  One day when you are all sipping pink daiquiris on a Hawaiian beach, you will look back with fond memories to the days when you were desperately trying to scrape together a few shekels to get in on Naspers just after they bought into Tencent.