Investment Tip: Join the 'Club'

In times of turmoil, we all need friends we can rely upon.

That's one reason you might want to consider joining an investment club as the shock of 2008 wears off and you consider ways to rebuild your portfolio. The education and support provided by an investment club can help small investors navigate these difficult times and provide a buffer against the urge to panic and sell stocks at low points.

"I think this has given us strength and given us focus," explained Marie Gaziano, member of a Massachusetts investment club since 1985.

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Her club, Investments Unlimited of Cape Cod, has not lost a single member as a result of the recent stock market swoon that began last year, and is even preparing to bring a new member to bring the total to 14.

"We didn't like it, but I don't think it's a reason to drop out," said Gaziano, a lighting design consultant who doubts she would have learned as much about investing without the club.

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An investment club is a small group of individuals who pool their money and together make investment decisions on a joint portfolio. Typically, members contribute a set amount of money each month that is then invested based upon decisions made during monthly meetings. Between meetings, individual members research potential investments in preparation for the next meeting.

"It's a wonderful learning experience," said Martha Schilling, a Dresher, Pa., financial planner who has been involved in three different investment clubs. "They promote value investing and not trading, getting a solid foundation, researching companies and doing comparisons, monitoring them."

Jen Sterling, the president of a Virginia-based investment club, said she and fellow members have tackled unfamiliar territory together without feeling intimidated.

"We can look at each other and go, 'What the hell's a margin?' or 'What's a stock buy?' or any of these terms that we don't know -- we can ask each other," said Sterling, the owner of a brand marketing and strategy company. "This is a case where we can all come together comfortably and learn something we were never taught."

Investment Clubs

Investment clubs in the United States have been around since at least the 1940s and received a boost in 1951 with the establishment of the National Association of Investors Corp., a nonprofit that serves as an umbrella for some 9,500 local clubs.

Now known by the brand name BetterInvesting, the NAIC provides investment clubs with startup advice, operations support and investment education materials. The organization says the average club features 11 members with each member contributing $84 a month toward the joint investment fund.

The average household income of investment club members, according to the NAIC, is significantly higher than the nation's average at $114,100. Sterling's household income is higher, at about $180,000.

But investment clubs don't cater exclusively to the upper middle class or wealthy. Setting a fixed amount for each member helps mitigate financial disparities between club members. The NAIC's $84-per-month average is below what many people contribute to their 401(k) savings.

That means the typical investment club serves as a supplement to retirement savings, rather than a foundation.

The traditional investment club model involved trading in individual company stocks, but now some clubs focus on mutual funds.

Ernie Felzani, president of BetterInvesting's Massachusetts chapter, said membership in his chapter has fallen since early last year, but that in November and December there were signs of a rebound. He thinks the current market conditions will lead to a gradual increase as small investors look for help.

At a meeting of Massachusetts club officers Saturday, Felzani said many in attendance indicated they are in a buying mood. "The educated investor right now is buying," he said.

Sterling said that, at one point, her club saw its portfolio rise by 46 percent. Then it was down more than 20 percent and club members grew nervous.

"We were all kind of scared with everything going on in the market and we just froze," she explained. But the anxiety didn't last long as club members comforted each other and, as a result, avoided making panicked decisions.

"If it was just one of us, we'd probably fester in our fear or do something stupid, like bolt," she said.

Club Members Share Financial Experience

Instead, the group decided "you really have to think about it like everything in the stock market is on sale. So, we decided to go ahead and actually buy and not hold back."

Kathy Hankard, a financial planner in Verona, Wis., belonged to an investment club when she lived in Colorado in the 1990s. She called it a great educational experience that influenced the philosophies that she now adheres to as a financial planner.

For instance, the experience of learning how much work is required to research individual company stocks persuaded her to favor index fund investing over individual stocks.

Should a client ever express an interest in joining an investment club, Hankard said she would likely encourage it after the client asks about the club's mission and philosophy.

"It's so much about the people and chemistry," she said.

You can learn more about investment clubs by visiting BetterInvesting.org and the Motley Fool Web site, which has a section on the subject. Also, the Securities and Exchange Commission provides information on investment clubs on its Web site, www.sec.gov.

ABC News' Alice Gomstyn contributed to this column.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

David McPherson is founder and principal of Four Ponds Financial Planning in Falmouth, Mass. He previously worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members provide financial advice to clients on an hourly, as-needed basis. Contact McPherson at david@fourpondsfinancial.com.

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