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Should You Join an Investment Club?

Investment clubs seek to ride their herd mentality to green pastures of profit and prosperity, but not without confronting two tricky signposts: either pointing to "there's safety in numbers" or "the masses are asses."

"Investment clubs are a great tool when learning how, what and where to invest," says Mike James, chief financial officer of Terra Tech Corp. (TRTC), a cannabis-focused agricultural company. "It can be a nice social setting where you learn from the research performed by the various members."

Many clubs, he adds, "are comprised of diverse individuals from various business sectors and levels of investment experience."

Yet it's also possible that club members, in an attempt to aggregate their knowledge, also unwittingly pool their ignorance -- especially when it comes to dotting the investment i's and crossing the trading t's.

"The pitfalls are like those with any other group or organization -- when your group isn't organized, when the members have conflicting interests and when clubs are formed loosely without formal rules," says Winnie Sun, managing director and founding partner of Sun Group Wealth Partners in Irvine, California.

Like a lottery pool or two couples sharing a multiunit property, investment clubs allow people to combine financial resources, such as funding a larger stock purchase or portfolio, even as the members further their education and experience with the market. They've been around for decades, and typically proliferate in communities and regions far beyond the bustle of Wall Street.

In those places and cases, it's not so much a matter of get rich fast as stick to the task -- and that's where the ticker hits the tape. "Most investment clubs have been established in bull markets and with short-term enthusiasm," says K.C. Ma, director of the George Investments Institute at Stetson University in DeLand, Florida. "But they're rarely sustainable, because most people will not volunteer their time in the long run."

Even though that donated time can turn into real money, it sometimes proves to be too much. "The operation, portfolio management, investment research and execution require more than several full-time jobs for managing more than one person's money," Ma says.

And among a loosely organized bunch, sometimes a hit-the-lottery mentality is hard to avoid. "People ask me from time to time what their club should invest in and I've found that advising them to stick with a balanced mutual fund, from a reputable money manger like Vanguard or Fidelity, is not what they are looking for," says Michael J. Driscoll, clinical professor and senior executive in residence at Adelphi University in Garden City, New York. "They want a tip on a hot stock. And one of the best tips I heard early on in my investing career was that if you want to make a little money investing in hot stocks, then start with a lot of money."

Indeed, two University of California professors, Brad Barber and Terrance Odean, found that the average investment club tilted its common stock investment toward high-beta, small-capitalization growth stocks -- with 60 percent of clubs underperforming a broad-based market index. The title of their paper? "Too Many Cooks Spoil the Profits."

"A big problem with investment clubs is group-think," says Robert R. Johnson, president and CEO of The American College for Financial Services in Bryn Mawr, Pennsylvania. "If a club is homogeneous in terms of construction, there is a danger that members will start to look at opportunities from similar perspectives. What you want in any kind of group is someone who will think critically."

But in an academic setting, and with the guidance of professors such as Ma, investment clubs and their close cousins can certainly work well. The Roland George Investments Program at Stetson is a high-performing student-managed portfolio. "They turned a $400,000 investment into $3.5 million over a 30-year period," Ma says. And leveraging their success, the DeLand Investments Club was born two years ago. "Their goal was to invest in the same stocks as the RGIP -- and just this year, the RGIP stock portfolio outperformed the market by more than 10 percent."

And clearly those aspects of investment clubs that attract widespread interest, including their potential for collegial exchange, have caught the attention of the digerati.

"While online will make aspects of investing clubs easier, especially on the organizational side, it's more of a substitute," says Raghav Sharma, co-founder and CEO of GuideVine.com, an online resource to match investors to financial advisors. "Online helps thought leaders to effectively reach an audience and makes 'followership' easy."

In fact, investment club variations for the high-tech era -- constructed on a social networking model -- fill the functions of learning and information exchange. While they don't team people up for group investment, per se, financial friendships are forged at these sites, which have a big appeal to millennials and digital natives.

Tip'd Off, based in Mountain View, California, creates a community of like-minded investors to learn the tricks of the trades, if you will. A news feed also updates users on other members' activity, and the platform links to more than 10,000 brokerages. Tip'd Off utilizes a "read-only" system, meaning nobody can place any real trades from the site. As recently as this spring, its waiting list was well above 5,000.

And among the first financial apps to land on the Apple Watch, Openfolio works in much the same way as Tip'd Off. Launched a year ago as the first smartphone app of its kind, Openfolio creates a space where you observe the investment strategies of people you know and trust, while sharing your own. Portfolio numbers are shared in terms of percentage allocations, not dollar amounts. Openfolio also connects with Twitter and Facebook.

The safe distance those platforms provide might present a smart alternative for some to the traditional club, especially when the people in the room know each other well.

"I'd say you should think long and hard about mixing friends with money," says Bijan Golkar, CEO and senior advisor at FPC Investment Advisory in Petaluma, California. "If you give a bad recommendation, will that strain your relationship? Are you considering that everyone has very different tax situations and if somebody needs to pull out that could cause issues with your funds?"

Rather than learning those answers the hard way, "and instead of doing an investment club, meet with your buddies but keep your funds separate," Golkar says. "Why make something more complicated than it has to be?"



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