Tight budgets, wild markets hurt investment clubs

Mon Dec 12, 2011 12:02pm EST

Dec 12 (Reuters) - Not that long ago, it seemed like everyone belonged to an investment club. People would gather at a friend's house, share a few bottles of merlot and toast their soaring investments in Cisco and JDS Uniphase .

And now? Not so much. The number of investment clubs reached 60,000 before the bursting of the tech bubble. Now there are just about 5,500 still hanging on nationwide.

"Oh, the numbers are definitely down," says Adam Ritt, communications director for BetterInvesting, the Madison Heights, Michigan-based investors' association whose members include clubs around the country. "It's been a steady trend downward for a long time."

Atlanta's Patti Ghezzi was one of those investors who decided to pull the plug on her club. She had originally banded together with around 16 friends to form the "Bullmarket Broads" back in the late '90's. "It was so trendy back then," says the 42-year-old communications consultant. "I knew of some clubs that did nothing but make money for years. Nothing ever went down."

Fast forward 10 years, and the Bullmarket Broads had dwindled to six die-hards. Some members had moved, some had growing families and shrinking free time, and some were discouraged by the stock market's 'Lost Decade' and its multiple equity busts. "It got to be kind of comical," says Ghezzi. "We'd buy a stock and it would go down, and then we'd sell and it would go up. We used to say, 'Let's get together for our monthly meeting and figure out how to lose more money.'"

As a result, club members finally decided to call it a day in 2009. "In the late '90s, many of my friends were in investment clubs," says Ghezzi. "Now, no one I know is. We're in book clubs instead."

There are a few reasons behind the dwindling number of investment clubs. One is the stock market itself, which hasn't exactly been a model of calm and consistency over the past decade. As a result, nervous retail investors have pulled $101.6 billion from domestic stocks so far in 2011, according to the Investment Company Institute. "There's some fatigue with the market," says Ritt. "People don't like being whiplashed all the time."

But that's not the only reason investment clubs might be going away. In the old days, says Ritt, people often divvied up the heavy labor of stock research, digging into annual reports and making presentations to fellow members. Now, with the array of investing sites available - from Yahoo Finance to Morningstar - people can crunch numbers and perform their own stock screens with a few clicks of the mouse.

There's also the little matter of money: We just don't have as much of it as we used to. Indeed, Americans have $1,459 less in per-capita disposable income than they did in the second quarter of 2008, according to the Commerce Department's Bureau of Economic Analysis. With a shrinking net worth and standard of living, Americans can no longer speculate on stocks with buddies. That $50 or $100 a month might be better put towards the mortgage or food.

Portfolio performance might have something to do with it, too. Research suggests that getting a bunch of investors together doesn't tend to improve returns. One study by academics Brad Barber and Terrance Odean, "Too Many Cooks Spoil the Profits," found that the average investment club lagged a broad market index by 3.8 percent a year.

"From an investment perspective, it's a completely counter-productive exercise," says Dan Solin, author of books like "The Smartest Portfolio You'll Ever Own." "People shouldn't be misled into believing this is a great way to increase returns, because it isn't."

Which isn't to say that investment clubs shouldn't exist. Just think of them as primarily social - a reason to gather with friends, to learn a little about the markets, to share that 2005 Bordeaux. Once you let go of any get-rich-quick expectations, and stop assigning blame for bad stock picks, you can preserve friendships and enjoy investment clubs for the social gatherings they are.

"Keep the stakes low, and don't take it too seriously," advises Ghezzi, who chipped in a modest $30 a month to her investment club. "Most of all, don't be unrealistic and expect to make a ton of money. Those days are over."

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Comments (2)
bivio wrote:
As in any activity that is about learning something new, some people do better at it than others. There are certainly long term investment clubs that have done very well. I think anyone who has ever thought of an investment club as some sort of get rich scheme was deceiving themselves.

It is true that being in a club is a social activity for many, but what is wrong with that? Investing is an interesting hobby and something that is fun to share on a regular basis with a group of like minded friends.

I don’t think you should downplay the many things that are positive about being in a club and spending some time each month learning about investing. It is something that you don’t really learn unless you really try doing it. A club gives you a cost effective way to do that.

Here is a recent note we posted on Facebook summarizing some of the reasons we see to be in an investment club.

http://www.facebook.com/#!/note.php?note_id=10150409704141445

Laurie Frederisen
COO
www.bivio.com

Dec 13, 2011 10:53am EST  --  Report as abuse
Kamie wrote:
The primary benefit of belonging to a BetterInvesting club is the structure and support provided for learning. Many people find investment education overwhemling yet understand the importance of it, and participating in an investment club is a low-risk way to learn about equity investing. Club members jointly analyze stocks and make investment decisions, and they share the risk associated with the investment. Being able to intelligently discuss equities with knowledgeable, unbiased investors before purchasing shares is a tremendous advantage. This is exactly the reason BetterInvesting was founded 60 years ago in Detroit, Michigan by everyday people like you and me.

The club structure also allows experienced investors who have been through downturns and volatility to counsel newer investors who might not be as able to put these market events in context. BetterInvesting clubs also have the advantage of being able to reach out to our dedicated volunteers and other like-minded investors for support.

BetterInvesting clubs and members are not professional investors, and yet we continue to actively invest and thrive in the current market. We know that investing regularly in high-quality growth companies at reasonable prices is key to our long-term investing success. We also know that we need to reinvest dividends and earnings and diversify our portfolios. BetterInvesting clubs and members are disciplined investors. We view the current volatile market as an opportunity to find quality growth companies “on sale.”

At BetterInvesting we know that anyone can become a successful long-term investor if they have the patience and the determination to follow commonsense investing principles. And we believe that everyone owes it to themselves to find out how.

You can learn about becoming a successful long-term investor by visiting us at www.betterinvesting.org/openhouse.

Wishing you better investing,

Kamie Zaracki
CEO, BetterInvesting

Dec 13, 2011 4:19pm EST  --  Report as abuse
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