Pandemic, Soaring Stock Market Spur New Interest in Investment Clubs

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.”

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.