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I am new to the investing world, so pardon me if I'm asking about things that are really basic...

My budget is slightly over $1000 but I was wondering if rather than trying to invest by myself, it would be better (in any relevant sense of the word) to gather a group of friends with similar budgets to start investing together?

Let's say that I am able to encourage 4 of my friends to start investing with me. That would make 5 of us, and if each had about $1000, then we would have a cumulative total of ~$5000

I know that investing this much together will lead to greater returns than if each of us were to invest independently, but I was wondering 1) how the division of returns would work in this scenario and 2) if there are any significant drawbacks to pursuing this path? Basically, is it really something I should spend the effort for looking into?

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    "I know that investing this much together will lead to greater returns than if each of us were to invest independently". How do you know that? It is possible all five of you will go broke this way, too. And why does pooling, even on a winning investment, produce greater individual returns? If you do the math, you are multiplying by 5 going in, but then dividing by 5 cashing out, right? Doesn't it work out the same? (The only savings I see is what jldugger said: trading fees). – Chelonian Oct 23 '11 at 18:34
  • "I know that investing this much together will lead to greater returns than if each of us were to invest independently..." What do you mean by this, Templar? – gef05 Oct 23 '11 at 20:08
  • @Chelonian The savings is really in expenses in general. With mutual funds, you can get access to lower cost share classes with a higher initial investment. With margins, you can get access to lower interest rates. – Eric Feb 1 '18 at 16:23
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Well, you can just say that 1 dollar contributed = one share and pay out dividends based on number of shares. That makes it pretty easy to make things fair based.

There are pros and cons with this pooling approach.

Pros

  • Much lower collective trading costs. If the five of you banded together that would be 5 times the brokers fees.
  • Some investments require you to have a minimum investment; having 5x the money will likely expand your investment horizon.
  • More heads thinking about things will improve your expected returns.
  • Division of labor means you can each specialize in parts of the market.
  • You get to learn about investing, and build a set of buddies you can go to for advice and opinions.

Cons

  • 1000 is not a lot of money -- I dropped that much into an IRA when I was in grad school.
  • Tax complications; you can only contribute earned money into an IRA, and they'll frown upon everyone dumping money into one person's account. So you're forgoing tax advantages.
  • Liquidity fights. Everyone is going to have different ideas of when to pull money out. Even if you write it down on a prospectus that nobody can withdraw money for 3 years, someone is gonna need the money to make rent or get tired of losing money and demand a withdrawl.
  • Opportunity costs. A number of college aged students carry credit card debt, which will cost more than an equal amount invested in the market will earn. I don't recommend this, but it stands to reason you could find friends carrying CC debt and loan them money at a cheaper rate to pay off the high interest CC with.
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    What does this have to do with an IRA? – duffbeer703 Oct 24 '11 at 19:38
  • Individuals can invest in an .. Individual Retirement Account. Groups cannot. – jldugger Oct 24 '11 at 20:50
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What you're referring to is usually called an "investment club". If you're serious about it, it's a great way of collectively learning about investing and organizing a cooperative venture.

A friend of the family has been involved with an investment club for about 30 years. It's a great way to keep in touch, learn and invest.

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    I think this is one of the greatest benefits that can come from such a club. 5 people leads to greater understanding of the system, the vehicles for investing, and is 5x more opportunities to learn something that you might otherwise have missed. Given the dollar amounts he's talking, what Duffman outlines will be the greatest return for sure. – Glorified Plumber Oct 25 '11 at 1:30

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