Michael Joy: “A group of employees of Nationwide Insurance are starting an investment club that I am considering joining. (I’ve actually gone to one of the meetings.) What are your thoughts on investment clubs?”

I think investment clubs are “good for America” because they’re part of the overall fabric that attempts to allocate capital sensibly . . . and the more people who are part of that fabric and feel a stake in it, the stronger we are.

They’re also, potentially, fun, stimulating, and a place to build friendships.

At the end of the day, however — “the day” here being metaphorical, and covering, say, a 10-year span — you will likely do no better than, and very possibly worse than, you would have done in an index fund.

Certainly in any given month or year you might significantly outperform the indexes. But I doubt your club can do it over the long run. Even the Beardstown Ladies, who sold millions of books based on their wildly miscalculated results, found that, at the end of the day, they did considerably worse than the averages.

There’s also the potential for disharmony with your fellow club members, either socially (have you noticed how annoying some people can be?) or for tax reasons. You’ll want your club’s partnership agreement to allow pro-rata withdrawals in stock as well as cash, to allow you to exit without generating a taxable gain; and to be able to withdraw your share of certain positions to take a tax loss even if others don’t want to, or to use a big winner to make your 25th college reunion gift.

Bottom line: If you’d enjoy it, by all means join the club. Otherwise — the occasional cater-waiter job? — put the same time into earning something extra to invest.

 

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