Investment Clubs - What You Need to Know
Clubs are able to invest in smaller and sometimes faster growing stocks were as a regular mutual fund is not often able to do that because they have to focus on large companies simply as a matter of scale.
Investing in the stock market can be hard for many people. It's a difficult undertaking to engage it on your own. Without any sort of advice or training, you can quickly find yourself out of your depths and there is a real possibility that you could lose your hard earned savings and put your retirement in jeopardy.
One way that many individual investors mitigate this risk is by joining an investment club. Investment clubs are simply clubs that people join that allow them to get together and discuss different investments, sometimes pool their money, and hopefully get a leg up on the stock market.
It has been suggested that the average investment club doubles the value of its stock portfolio every five years. This is a broad generality of course, not all investment clubs are necessarily good simply because they exist. On the other hand, very few mutual funds can claim to have such a successful record, which is something you should really keep in mind!
Why do these silly little investment clubs beat out the big bad mutual funds year after year? It's a good question and there are several reasons...
One reason is that funds have to pay their managers. That money comes out of the general profits of the fund therefore every dollar you pay to the fund manager is a dollar that comes out of your portfolio. Clubs don't pay managers so therefore don't have that added expense.
Clubs are able to invest in smaller and sometimes faster growing stocks were as a regular mutual fund is not often able to do that because they have to focus on large companies simply as a matter of scale. Mutual funds direct billions of dollars and it's physically not possible for them to buy stock in small companies because those small companies may only have five or $10 million worth of outstanding stock and the mutual fund has got billions of dollars that they need to stash somewhere.
One dirty secret in the mutual fund industry is that their quarterly reporting requirements often force them to do a lot of expensive and unnecessary trading. That trading and the fees involved with them comes out of your bottom line, and decreases the value of your portfolio. This obviously doesn't happen in a club setting.
Finally mutual funds usually get buffeted by fund investors who pull out their money when the stock market drops. It's a fear thing. When the stock market falls people get scared and take their money out which drags down the performance of the mutual fund. The fact of the matter is, when the market is down that's the time to buy, not sell... but the herd mentality runs rampant at mutual funds. This sort of thing doesn't seem to happen as much in investment clubs for some reason.
So there you have it, several things you needed to know about investment clubs and why they are better than mutual funds in almost every circumstance. Of course, as with any investment opportunity, be sure to do your own research and your own homework before investing your money in something you don't understand.