AS investment practitioners, we have consistently encouraged individuals, households and businesses to devise ways of generating multiple streams of income.
As illustrated in the infograph, investing in stocks on the local bourse is one way of building an investment portfolio over time.
It can also be viewed as a disciplined savings effort that pays off when one retires with an intact nest egg.
However, when it comes to the stock market, we recommend participants to invest in education and have a thorough understanding of the underlying businesses.
An interesting approach to getting started on your trading and investing journey is through investment clubs.
This is a great way to generate value by pooling funds and sharing ideas while offering an avenue to diversify a personal or household investment portfolio.
Different types of income streams
An investment club is a small group of individuals, generally consisting of between 10 to 15 members and usually comprising of friends, co-workers, church members, neighbours or family members.
- The concept of investment clubs
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These people pool a set amount of money and meet on a regular basis (usually monthly) to invest in a combined investment club portfolio.
The obvious advantage is that such clubs bring a diverse group of people that share insights, experience and investment knowledge.
In addition, by investing small amounts regularly, one can build up a substantial portfolio over time, without having to make a big once-off investment.
One can consider starting or joining an investment club if they would feel more comfortable learning about investing with others or they have been putting off learning about investing and sense that having a responsibility to the group would give them the much-needed discipline.
Sometimes it could just be fun to have a group of people with whom to share company research and discuss investment topics.
Benefits of investment clubs
An investment club makes investing and trading shares sociable. Meetings can take place online (Zoom, WhatsApp, Microsoft Teams), in restaurants, pubs or where members can sit to discuss investment ideas.
This makes investing fun as opposed to making decisions on your own. The following are some of the benefits of being part of an investment club;
Informed investments: The collective brain power and experience of people who each have knowledge and experience of different market sectors will produce opinions and information that will guide you to sensible decisions;
Profit opportunities: Research shows that collective investment decisions based on discussion and democratic choice are more likely to produce sustained profits. By pooling your money with others, you can also own a wider range of shares;
Spreading the workload: Research and analysis into potential investments can be structured and spread between club members;
There is safety in numbers. Several people evaluating a share purchase are less likely to make the wrong decision; and
Low risk: Pooling a relatively small amount of money with others every month will be an ideal way to gain hands-on experience of how the stock market works.
Once a group has agreed to set up an investment club, there is need to choose an appropriate legal structure for the club. There are several options such as a general partnership, a company or a voluntary association.
It is recommended that members weigh the pros and cons of each structure before committing to one. The next stage would be to come up with an investment strategy for the club.
Choosing a strategy is crucial in developing and implementing a plan aimed at achieving the set investment goals.
For example, one strategy could be focused on buying growth stocks (companies whose turnover is increasing faster than the industry in general) while also investing in different industries and different-sized companies to achieve proper diversification which helps reduce risk and increase opportunity for gains.
All in all, the main advantage is that one can invest a set amount regularly (usually once a month). Dividends and capital gains can be reinvested, implying that the money grows faster due to the power of compounding.
- Matsika is a corporate finance specialist with Switz View Wealth Management. — +263 78 358 4745/ batanaim@switzview.com
