If you had brought up stock market investing with Cynthia Bonhom-Williams a few years ago, it would have been a pretty short conversation.
“I always shied away from it because I never thought it was for me,” says Bonhom-Williams, 50, a management analyst for the federal government in Glenn Dale, Maryland. “It was scary.”
Fast-forward to 2021 and she finds herself in a surprising position: cofounder of an investment club, named InTheBlack. She and eight fellow investors get together for regular Zoom sessions, talk about the markets and chip in $100 a month each toward buying company shares. Their first picks so far: Microchip maker AMD and decking manufacturer Trex.
“The pandemic opened our eyes about what we need to make for the future, because nothing is promised,” she says. “It was a rude awakening that we need to get our stuff in order, so we can leave a legacy for our families.”
Bonhom-Williams isn’t alone in looking to investment clubs as a fun and social way to learn about the markets and (the hope is) make a little money at the same time. The number of investing clubs has more than doubled in the past two years, according to the nonprofit organization BetterInvesting.
There are a few factors driving that. One is a healthy stock market, which, aside from a brief COVID-19-inspired spasm in 2020, has been in a bull market the past 12 years and is currently bumping all-time highs. Another is the advent of easy-to-use apps like Robinhood that appeal to younger generations and have introduced a new consumer segment to the investing world. A further contributor is this unique time we are all in — the COVID-19 pandemic, which has reshuffled priorities in many ways.
“The pandemic has played a big role in this,” says Ken Zendel, CEO of Troy, Michigan–based BetterInvesting, which helps investment clubs with stock-picking research and accounting software. “One reason was that, especially early on, everyone was at home and trying to decide what to do with their time. So people wanted to learn more, they were looking for ways to have social interaction, and now they could meet easily online via Zoom.”
How it works
How an investment club is organized is up to its members. At some, like Bonhom-Williams’ InTheBlack, every member contributes the same fixed amount each month. At others, the size of contribution varies depending on the members' means, giving some a larger share of ownership.
Typically, an established club might have between 10 and 20 stocks in its portfolio, Zendel says. Most clubs tend to range between eight and 12 members, and although some might involve just a handful, others can have rosters over 20. The bulk of them tend to be created by investors in their 40s and 50s, who are “looking at retirement 10 or 20 years away and starting to wonder about how they are going to get there,” he says.
Sometimes, though, clubs can be multigenerational. For instance, when Peter Smith, of Marshfield, Massachusetts, set up his club three months ago, he had an ulterior motive in mind: to teach his family’s next generation about investing so they could be smart stewards of wealth going forward.
So people had to join in pairs; Smith, 61, brought in his son Alex, 25. Their mission statement: “To provide a platform for the family to achieve financial investment education, wealth creation and financial security through generations.”
Perhaps even better, it gives the family more quality time together, a bonus in this COVID era when Americans have been so socially disconnected. “I feel like I’m doing something that will live past my life and leave something for the next generation,” Smith notes. “I’m also spending more time with them at a different level than I’ve ever spent before. It opens up a level of friendship with the next generation that you just don’t get.”
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3 tips on running an investment club
Setting up an operation involving multiple investors, and having it endure over time, can be a challenging exercise. Here are a few tips for making it work.
1. Get the group dynamics right. There are many schools of thought when it comes to investing strategy. Some prefer high-flying "growth" stocks, such as Tesla, while others lean toward unloved "value" stocks, figuring that one day Wall Street will wake up and love them again. Others are crazy for hot trends like Bitcoin. If you are putting together a group of investors, try to ensure that members are more or less on the same page.
“It’s really important to have aligned personalities,” Wasik advises. “If you are thinking long-term, but other people in your club just want to make a quick hit and get in and get out, then it probably won’t work for you.”
2. Keep the books in order. Just as you are interested in your club’s returns, so is another organization: the IRS. Pooling money is serious business, not something to be done casually on the back of a napkin.
That’s where an organization like BetterInvesting can help you, by providing the tools to set up your club properly. “One of the first things you want to do is create a partnership agreement and form a legal entity,” Zendel says. “Most clubs prefer a general partnership; some clubs prefer an LLC. Whatever you choose, you will need a federal tax ID number for tax returns.”
3. Put the time in. One main feature of an investment club is that you can divide the labor. Instead of having to keep track of the entire stock market, you can personally focus on a handful and keep up to date on the latest news and earnings reports. But that takes some time, so if you don’t have it, a club might not be the best option for you.
“You have to be committed to learning about stocks and investing,” says Smith, whose club is just starting to make its first purchases, including Google parent Alphabet. His club meets the second Wednesday of every month for about 90 minutes; members put in additional hours of research outside of that, with two stock presentations being made to the group each month.
The million-dollar question
The big question, though, is, how do investment clubs perform versus the broader market? Every organization is different, of course, just as every investor is different. But there are a couple of interesting points to consider.
One data set is the "BetterInvesting 100," the annual list of the 100 stocks most widely held by the organization’s clubs. As of the end of October, that group’s Total Return Index boasted a five-year compound annualized growth rate of 18.88 percent, compared with the S&P 500 Equal Weight Index of 16.37 percent, besting the S&P total return by around 2.5 points a year, Zendel observes.
That suggests that, on an aggregate basis at least, club members have been doing nicely. The three most widely held companies by investment clubs in its most recent edition (compiled at the end of 2020) are Apple, Amazon and Microsoft.
But there are some worrisome numbers, as well. One academic study from 2000 — “Too Many Cooks Spoil the Profits,” by professors Brad Barber and Terrance Odean — revealed that 60 percent of the analyzed clubs underperformed the market and that, on average, clubs lagged broader benchmarks by 4.4 percent annually.
A main culprit for that result was frequent trading, with clubs turning over their portfolios by around 65 percent every year. (One caveat from the study’s coauthor Barber: “Much of the underperformance is from transaction costs — spreads and commissions, which have declined dramatically since the 1990s when the study was conducted.”)
There are also cautionary tales, like the famous Beardstown Ladies, whose homespun Midwestern wisdom supposedly led to eye-popping annual gains of 23.4 percent, according to their best-selling book in the 1990s. As it turned out, minus club fees and accounting for math errors, their 10-year average returns were a more modest 9.1 percent.
Instead of a road to untold riches, think of investment clubs as more of a social and educational endeavor. By dividing the research labor and stress-testing different investing ideas, you can boost your own market IQ and apply that knowledge to the rest of your non-club portfolio, too.
At the same time, you can broaden your social network and interact with your group regularly. In an era when researchers consider loneliness epidemic — especially for older Americans, whose circles have shrunk over time, particularly so in this pandemic period — that is no small benefit, as socializing can bolster both mental and physical health.
“It’s a very social activity,” says John Wasik, author of The Investment Club Book as well as his most recent Lincolnomics, who himself was part of an investment club for many years. “Once people get into it, it can be a good way to make money and to do something interesting in community with other people."
Of course, even with plenty of research and the best intentions, stocks can go down. And individuals are typically vulnerable to all sorts of behavioral biases that can make for bad investors, like chasing returns of the latest hot stock.
But if you go into investment clubs with your eyes wide open, they can be a useful way to learn about the markets, stay connected and build a portfolio to supplement other savings. “My advice is, don’t let it scare you even if it’s not something you’re used to,” Bonhom-Williams says. “My whole thing is, be slow and right, instead of fast and wrong.”
Chris Taylor is senior correspondent with Reuters, covering personal finance and workplace issues. He is a frequent contributor to Fortune Magazine, and has won journalism awards from the National Press Club, the Deadline Club, and the National Association of Real Estate Editors.