There are plenty of fun ways to lose money with your friends.
You could go out for a night of socializing and drinking; you could spend some time with buddies in a local casino, or you could join an investment club.
What? The first two money losers make sense, but the third one…the investment club?
Yep. The average investment club, according to Dan Solin’s article in the Huffington Post, loses 3 percent per year to the market index. That might sound like gerbil food, but check this out:
- $10,000 invested at 0% for 20 years = $10,000
- $10,000 invested at 3% for 20 years= $18,061
According to the investment club tracker at www.bivio.com, the average American club had a total portfolio of $84,238, as of February 11, 2012. If you divided that sum by eight members each, you could surmise that the average investment club member has $10,000 worth of skin in the game.
But why do investment clubs perform so poorly? There are two main reasons:
They like to buy what has risen
As I recently published in a Canadian Business article (February 2012) most people like buying investments after their prices have escalated. They feel good about buying products that have become more expensive, and they shun products that have fallen in value. In essence, people feel good about buying high and selling low.
As it pertains to investment clubs, I can prove this.
Think of a stock that has quintupled in price during the past five years: Apple.
At www.bivio.com the company tracks thousands of investment club holdings, including the 3M Investment club which I wrote about in my book, Millionaire Teacher, and in this 2008 MoneySense article.
On Bivio’s homepage, they reveal the stocks that are most popular among investment clubs, based on their percentage of ownership within the clubs themselves.
Apple didn’t used to show up on this list. Ten years ago, when the stock was cheap, nobody seemed to own Apple shares. But now? More than 34% of American investment clubs own stock.
And when did the largest number of investment club purchases take place? According to Bivio, it was January of 2012.
Here’s a one year chart of Apple’s share price below. Check out the meteoric rise in price, and recognize that most investment clubs added shares late in the game. Five years ago, this stock didn’t appear at the top of club purchase lists. But today it does.
I don’t know whether Apple will continue to do well, but I do believe this:
Most of America’s investment clubs haven’t made much money on Apple shares. They could have bought shares for a fraction of the current price, just a handful of years ago, but most people are afraid of stocks that haven’t recently risen.
In contrast, it’s likely that most clubs felt really good (or safe) about paying a premium for Apple shares in January of this year.
The second reason most clubs underperform: group dynamics
It’s not hard to see why most investment clubs underperform the market. Even if two or three members understand that they should be greedy when others are fearful and fearful when others are greedy, they’ll get outvoted, generally, by the fear and greed of the group.
That’s a pity.
There are more enjoyable ways to lose money with your friends.
