Wealth through conventional investment principles

Why an investment club

Many people dream of their capital working for them while they concentrate their time and energy on their full-time jobs or their main source of income. You are by nature an enterprising person, have made your own enquiries and have learnt about the potential benefits and superior investment returns of the stock market as an investment vehicle. For a while already you are toying with the thought that an investment in shares on the Johannesburg Stock Exchange (JSE) is perhaps the place where you would want your money so that it can work for you. You are all fired up and very keen to get involved.

A little bit of further research of your own and you quickly have a short list of items which require further careful consideration on your part?

Firstly is the knowledge aspect and you realize that you do not know enough about the stock market and about stock investing to make sensible and wise investment decisions. Not even to think of the criteria of how to select shares and then to select the right shares and when is the right time to buy it.

You already know through your initial research that you will need a well-diversified portfolio of shares to properly manage your investment risk. Your portfolio should ideally consist of shares of not less than eight companies. You realize that you will need a meaningful amount to invest to be able to structure a properly diversified portfolio of shares. It may take a long time to get enough capital together for a properly diversified portfolio, especially should you only start out now and plan to accumulate investment funds by making regular monthly contributions into your share investing account?

Transaction costs on small buy / sale transaction amounts is also very high and can be as much as 10% of the investment / transaction amount. Transaction costs works on a sliding scale and will be significantly less on larger transactions and larger investment amounts will be preferable.

You are by this time also fully aware of the risks inherent in stock market investing and the potential for losses through lack of knowledge and experience. The risk inherent in investments, especially investments in shares, is something you would rather like to share with others.

You have made up your mind and are determined about making your money / savings work for you and it is going to be the stock market. For you it is more than money and the potential for superior returns, it is also about the thrill of learning about something new. The added benefit it that you will know a lot more about money matters which will put you in a position to take more control of your own financial destiny and to manage your own financial affairs a lot better.

You do not feel comfortable to get involved and to learn about investing in shares on your own and would prefer to do this together with others. This being the case, then there is probably no better way to get started than by becoming part of an investment club, either by joining an existing club or starting a new one. The club is all about not being alone in the game.

The club is simply a coming together of a group of people to pool their resources (money, knowledge, experience, time, etc.) and to work together to grow their wealth over time.

Investment clubs are started for a variety of reasons which may vary from being a focused business to a social club with investment interests only.

Clubs have many advantages ranging from learning together, sharing the research workload to identify suitable shares to buy, pooling your money to save costs and to create a well-balanced and properly diversified portfolio, etc.

Another very important consideration is personal income taxes: A very favourable tax regime can be created for members of an investment club, provided that the tax aspect is give due consideration when the club chooses it’s legal / business structure. The tax aspect will be discussed in a separate article.

The club then in summary is an ideal vehicle to;

  • Share Investment costs and capital for the purchase of blue chip shares on the Johannesburg Securities Exchange (JSE) is acquired much quicker.
  • Learn together. The educational value of working within a group cannot be over emphasized. It takes time to learn, gain the required experience and to develop the emotional discipline to be successful on the stock market. All of this can be accelerated by drawing on the collective knowledge, insight, experience and wisdom of the team.
  • Build wealth over the long term
  • Your emotions: The stock market is at best a very volatile environment and can easily get you to panic and make emotional decisions. By working as a group you are able to control your emotions more easily and stick to your chosen investment plan.
  • Encourage savings

Saving and building of wealth should be a priority for every single person. The only way to create wealth is through investing in growth assets which will outperform inflation. Higher rates of return unfortunately goes hand in hand with more risk and more complex investment instruments. There is therefore a good case to be made for persons to at least initially work together.