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Should you start an investment club?

 Voleo

April 3, 2018

If you’re not yet familiar with the concept of an Investment Club, check out this post

Investment clubs exist for mutual benefit; beyond the obvious lack of management fees, there are logical and emotional reasons as participants consider starting an investment club to utilize the collective knowledge to increase their wealth and status.

If you’re wondering whether or not you should you start an investment club, here are 4 reasons you may want to consider.

Fees seriously hurt returns

We all know this intuitively, yet a surprising number of us have accepted this drag on our accumulation of wealth.  I have run the numbers, and a person who invests a lump sum with traditional advisors or fund managers while in their twenties and withdraws it at retirement will lose — brace yourself — more than a third of their wealth thanks to fees[1].  It is why your financial advisor lives in a nicer house and drives a nicer car than most of us.

Starting an Investment club provides an alternative that empowers retail investors, regardless of whether they have a mountain of knowledge, hoard of cash, the time to conduct research and confidence required to go it alone.  And while discount brokerage commissions are low, splitting them makes investing even cheaper.

Investment clubs are fun and educational

Traditional investment clubs improve their members’ understanding of the markets and ensure they didn’t miss out on opportunities identified by their peers.  Technology now enables a far more powerful iteration: a record of all your personal decisions.  Seeing how your club performs against what would have happened if everyone had listened to you is fun and informative.

More importantly, as far as your wealth is concerned, transparency will enable the voices of those who consistently make good decisions to be taken more seriously by the investment club, and for you to gather insights in real time from the top performers across the community.

It’s friends with real benefits

Participants in any type of club are members because they value the experiences, relationships, and status that those clubs offer.  Investment clubs are no different; whether a close-knit family, good friends, or professional associates, taking part is a social activity.  Historically this meant getting together, and now, after starting an investment club, it means exchanging ideas instantly wherever you are.

While you may be a confident investor, being part of an investment club ensures you don’t miss out on trading ideas from your network.  Meanwhile, your less experienced peers will value the support and validation that comes with being part of a team.  Most of us have friends who claim to be scared of the market, but if invited to participate alongside someone who invests, at the same time and price, most are interested.  As an experienced investor I certainly have ideas, but leveraging our combined expertise is likely to yield even better results.

When you all have a vested interest in seeing something succeed, your interests are truly aligned.

Leveraging the wisdom of the crowd

In any given social cohort complementary skillsets and knowledge are present, and combining them yields informational advantages which improve the decision-making process.  Some of this relates to our professional expertise and some, based on complementary perspectives.  In one study of over a thousand investment clubs, mixed gender teams generated excess returns of 2% per year relative to those composed of all men or all women.[2]

Sharing insights and knowledge is more relevant now than ever as we’re all using filters on the vast quantities of information that is thrust upon us each day.  Access to the top ideas from investors who are transparently ranked by their decision history is powerful.  Validating those with your trusted peers ensures you are not unilaterally copying a stranger (and yes, you should always approach ideas critically, as your money is at stake).

Why aren’t there more investment clubs?

With the rise of online trading twenty years ago, interest in the traditional form of investment club waned. Trading on your own became cheaper and until recently these clubs couldn’t adapt to life in a mobile world.  Now that Voleo has developed a solution built for the next generation of investors there is a new wave of interest in what was always a great idea. Starting an investment club has never been easier.

Interested in starting your own Voleo investment club? Just download the app for iPhone or Android, invite your friends or colleagues and get started! If you’re interested, but not quite ready, you can always start a SimuTrader investment club. With our SimuTrader app, (iPhone and Android), we give you a hefty portfolio of play money to practice investing in the markets with. It’s a great way to try out those stocks you’ve been considering!

 

[1] Invest at 25 years old, return 7% per annum in a tax deferred account until retirement at age 65.  Result is investments are worth 16x the initial balance.  If you deduct a 1.5% annual fee based on the opening balance each year, that same investment portfolio would end up worth 9x the initial balance.

[2] Harrington, Brooke. 2008. Pop Finance. New Jersey: Princeton University Press p.75.