The Death of Investment Clubs: Why It Could Be a Good Thing

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investing-clubsSome Americans use the stock market as a reason to drink beer together, gab about the economy and pick their next investment. Investment clubs—small groups of people who gather to learn and practice investing together—were once very popular.

In fact, in 1998, there were over 400,000 Americans participating in local investment clubs around the country. Today, according to the Wall Street Journal, that number has shrunken by about 80%.

After five years of erratic and, frankly, mediocre stock market performance, investment clubs have lost a lot of their cachet. Even the National Association of Investment Clubs has changed its name to BetterInvesting to reflect the new reality—Americans just aren’t that into investment clubs anymore.

We’re Turned Off by Investing Itself

One of the broadest measures of the stock market, the S&P 500, has been up about 12% over the past five years—which isn’t so great, considering that the stock market’s historical return is an average of around 10% per year. And that’s piled on top of our collective memory of the stock market dropping over 50% between 2007 and 2008.

RELATED: Quiz – Should You Be Investing?

It’s not just that people are disinterested in investment clubs … they’re shying away from investing as a whole. We can see this in historically low stock market volumes: The average number of shares traded daily on markets like the New York Stock Exchange hit a five-year low in 2012.

Since Americans aren’t that excited about their investing options, they seem to be voting with their feet—by leaving investment clubs.

Old-school investment clubs may have also given way to a new form of social investing that’s happening online. According to Nielsen, more and more investors are turning to financial sites, ranging from Morningstar.com to The Motley Fool, to research investments and get advice.

LearnVest certified financial planner Ellen Derrick has watched technology outpace these old-fashioned clubs: “I remember working with some investors back in late 1999 when they would all pool money to buy a couple shares of stock. Now, you can cheaply buy ETFs, which are so much better in terms of diversification and trading cost.” So perhaps it makes sense that investment clubs have gone the way of the floppy disk.

RELATED: Peer-to-Peer Investing – Good or Bad Idea?

Are Investment Clubs Even a Good Idea Anymore?

Once considered as American as baseball and apple pie, investment clubs yield better results than going it alone … according to common wisdom, at least.

In 1998, the National Association of Investors Corporation (NAIC) reported that 60% of the 35,000 investment clubs in the U.S. regularly beat the stock market. However, two academics found that the opposite was true: Terrance Odean and Brad Barber determined that around 60% of investment clubs actually underperform the market. They also found that investment clubs actually perform 20% worse annually than individual investors picking their own stocks.

The culprit?

  • Guest

    Really? You JUST posted an article about how great it was to join an investment club.

  • Bill4112

    This article claims that “investors who participate in investment clubs pick riskier investments and trade more frequently”. In my experience, investment club members research their stock purchases far more thoroughly than the average individual investor does before investing. As for trading more frequently, investment clubs BUY more often because they use dollar cost averaging to reduce their average cost. They do not sell very often, and when they do, they generally do so because the company’s fundamentals are deteriorating. The article is correct when it says that a group of friends can provide encouragement to someone who is reluctant to invest, but the members of an investment club can and do provide the same encouragement. Finally, the article misses the three best reasons for joining an investment club: (1) an investment club is a great way to learn how to invest; (2) the more experienced members of an investment club can provide the support that an investor needs to avoid buying high and selling low; and (3) members of an investment club share the effort of researching investments (mostly via use of the Internet). There are even investment clubs that operate entirely over the Internet. Yes, being a member of an investment club requires a certain commitment, but the education, encouragement, and time saved is well worth the time and effort required.

  • Michael Sanders

    Clearly, the author has an anemic view based upon his obviously-limited understanding of investment clubs, poor research skills and lack of personal experience. I’ve been the member of several investment clubs. Each were very successful. The current club I’m in is particularly successful, so much so that our cumulative ROI has always beat the market b/c we pooled our initially-limited personal funds into a self-directed ROTH-IRA owned by the group, as a sub-S corporation of 75 investors. Pooling our funds enabled low-income investors (like I used to be) to be able to afford the higher-return investment vehicles that most if not all low-income investors cannot possibly afford on an individual basis. We spread our risk as a return-based formula, so that only 10% of our funds went toward what most would consider risky. Yet, our gains always out-paced our losses. Our mid-level risk investments are ETF’s, foreign currency and precious metals. Our conservative investments into tax liens and tax deeds across the U.S. returned 16% to as much as 36%, on average. Though, one company we deal with buys tax liens in bulk for a 14% discount, meaning that our returns sometimes average 50% in Texas. Tax lien investing has been around for 150+ years. Tax liens are guaranteed by the state governments in the states where they’re issued. We’re also investing in other markets. We prefer variety over volume, so that we only buy one contract in any one ETF at any one time. And, we paper-trade said ETF before we ever buy it. Also, we thoroughly research ALL investments, beforehand. And, ALL of our members are graduates of the Dave Ramsey financial education series. Nobody in said club invests money that they cannot afford to lose. Everybody has a written budget. Since our group is maxed out at 75 investors, due to state limitations on sub-S corporations, we’re not accepting new participants. But, I may form my own investment club in a new sub-S corporation. Sub-S corporations avoid the double taxation inherent with class C corporations. Our next goal is to form a federal credit union for said low-income investors.