KEY POINTS:
If you want to get started in share investing and never quite had the nerve - then turn it into a team sport and form a share club.
Small beginnings can result in big things. According to the Investment Research Group (IRG), which runs the website www.shareclub.co.nz, many
clubs on its books have turned $20 a week into a portfolio pot totalling millions.
David McEwen, managing director of IRG, says one of the most successful share clubs is run by a group of 25 Auckland teachers.
The members started off contributing $15 a month each in 1983 and that has subsequently built up to $100 a month. Despite all of them taking money out from time to time for house renovations, weddings and overseas trips, the fund is still worth $3 million. The average club on IRG's books has built up $30,000-$50,000 over a number of years.
Typically clubs start when a group of work colleagues, friends or extended family team up. An alternative is to buy into an existing club. Local clubs can be found through the website.
McEwen recommends new clubs invest about $400 a month between them as a minimum. With 20 people, that's just $20 per person.
Mark Hiess and nine friends who had all studied law and/or commerce at Victoria University got together in early 2005 to form a share club.
The plan, says Hiess, was to broaden their financial education. They set the club up as a company called GMC Capital so that they could also learn how company structures work.
The members each contributed $1000 initially and have a verbal agreement to contribute lump sums as necessary.
Instead of meeting in person, the busy professionals do much of their collaboration via email. When the club does meet in person in Wellington they set up a conference call with the two members who live in Auckland.
The group's initial stock picks dropped in value after the UK market took a turn for the worse. However, GMC is now back in the black.
"The most profitable investment so far has been the FTSE 250 index fund, having returned approximately 12 per cent unrealised gain after six months," said Hiess.
Share clubs tend to be fairly conservative in their investing, says McEwen, partly due to the democratic nature of stock picking. "Decision making will often be based on what they read in the paper or heard from the neighbour, rather than systematic." The drip-fed style of investing means that clubs take advantage of dollar cost averaging. Many re-invest dividends, which helps their investments compound.
A club portfolio needs to be built up steadily over time. Members also need to manage different investing styles.
Some members will be "value" or "growth" investors by nature. If clubs aren't democratic then certain members will lose interest and go away.
Making investment mistakes is also part of the learning process. Not every sure-fire winner will turn out to be a success. Just ask the investors in Feltex about that.
For newbies, it's probably worth reading a book or two about share clubs such as Tim Hewat's Welcome to the Investment Club, which is available from the Good Returns Bookshop.
There are also a variety of useful resources online such as www.proshare.org.uk, a UK organisation promoting share clubs, which has an active forum covering more obscure topics such as what to do if a member wants to take a sabbatical or maternity leave. General share investing forums such as www.sharechat.co.nz are also helpful.
Another source of useful information is the short online "course" on investment clubs provided at www.incademy.com. It covers those obscure, but necessary topics such as "preparing for an inaugural meeting", the cash account, the capital account and the asset register.
Most clubs have a constitution and a sample one can be found on the share club website. In addition, for a fee, the site provides investment newsletters and templates for reporting functions such as meeting minutes.
Some clubs die a natural death after falling into a number of pitfalls. Having rules and a constitution makes good sense.
According to Proshare, some guidelines worth sticking to are:
* Don't waste time on non-essential discussions. "It's all too easy to get into deep discussion about what likelihood is there that the treasurer might run off with the money."
* Don't let a silver-tongued member dominate share discussions. " Have a set of rules which ensure that you cannot vote on a share before you know all about the business concerned."
* Don't stick to too narrow a field of investing. Try to get members with wide knowledge.
* Do take your time. "If in doubt, don't ... always err on the side of safety."
Technically share clubs are registered as "special partnership" with the Inland Revenue Department and have to be limited to 25 members. Each individual is liable for tax on their share of the income.
