An alternative to managed, pooled vehicles looked after by a professional is an investment club. This is a group of private investors who pool their cash and jointly decide how it should be invested. This has the advantage of spreading holdings over a larger number of investments than any single member could manage, without having to pay the fees of a unit or investment trust or other professional management company. You forfeit the expertise of the unit and investment trust people but have the fun of picking your own shares (or any sort of investment) and get a social occasion thrown in as a bonus. The attractions are becoming more well known: in 1997 there were about 350 clubs, but the London Stock Exchange estimates there were 5,000 by 2009.
The ideal number of members for a club is somewhere between three and 20. With more than 20 members the club will be called a corporation by the Revenue and you will have to start paying Corporation Tax.
The specialist charity ProShare publishes a handbook with some useful advice on how to go about starting a club; most experts recommend members read other guidance as well to get a broad range of expertise. It is not vital any member really knows about the intricacies of the stock market, but it is handy to have a range of knowledge among members about, say, engineering, brewing, retailing and so on.
It is vital to get the organization set up on a formal basis or there could be some very painful surprises and arguments later. There are model rules and constitutions available, which everyone has to sign. These set out, among other things, how people may join and leave, a unit valuation system and how decisions are made. A wide range of other issues need to be agreed: the level of monthly subscriptions; when and where the members meet; how decisions are made; appointing a chair, treasurer, and secretary; and deciding on bankers, stockbrokers and accountants. You have also to decide whether the club will continue to accumulate a portfolio or whether it is to have a finite life of, say, five years, after which the proceeds are shared out among the members. Some have specified that there be no recriminations if an investment goes wrong. Also, some formal mechanism has to be set up for the holdings. They can be held by one member on behalf of the rest (usually the treasurer), or by a nominee company set up for the purpose, or even by a bank. Several stockbrokers have packages for investment clubs.
You might be invited to join an existing club, in which case it is wise to check that all these decisions have already been made and are in accord with the sort of thing that feels comfortable. Also check that the monthly contribution is in line with what you can afford or would want to put in.
If this route sounds fun, there are still some basic considerations to prevent tears later. First, only get together with people you like and trust, and whose objectives and preferences are similar to your own. If you fancy taking a punt on the latest high-technology startup or going for risky recovery stocks, it would be a mistake to join a club whose members reckon buying into Vodafone is pretty racy.
The criteria for choosing investments vary widely among the clubs but many opt for the riskier end of the market because the club participation is additional to the investments members have already made on their own behalf. So, they are generally fairly ready to go for Aim, technology stocks and the like. Some even extend beyond the stock market and invest in property, directly or indirectly. The main advice of the experts is not to invest in anything you do not understand and most professionals strongly suggest avoiding the complex and risky end of the market, like derivatives.
Second, it is not a free ride where you can relax on the coat-tails of more expert and hardworking members. Most clubs share out the work and make it clear they expect people to participate beyond just putting in the monthly money, even fining them if they turn up late for meetings.
Most clubs invest well under £100 a month – a common figure is about £20 to £40 – so this is not the prerogative of the wealthy. Conversely, it is unlikely the proceeds will allow anyone to retire at 30 or buy a Caribbean island. But you never know – the Hampshire village of Whiteparish has a club that managed a 49 per cent return on its investments (and won the prize for being the best), and even some children’s clubs have managed returns pretty close to that. Several have built portfolios worth £500,000. Only a few have done so badly that members have lost their cash.