Joining an investment club

The Money Engineer

An investment club is a group of individuals who meet for the purpose of pooling money and investing. There are several investment clubs in Uganda though they are not really regulated. Several commercial banks have tried to promote investment clubs as a way of increasing their deposits.

Investment clubs can be an effective way of building a savings habit. It can also be a way to acquire assets or investments which one normally be unable to do on their own. If managed well, investment clubs can enhance the personal relationships and build social capital for the members.

However before joining an investment club the following key considerations need to be made:

1. Your personal goals should be able to reconcile with the groups objectives;
2. You need to be able to save a portion of your income towards the group on a regular basis. The savings amount will determine the kind of investments the club can make;
3. Legal considerations. The investment club should be a legal entity e.g. a company or partnership. This will help to limit members liability.
4. Social considerations. Group members should have something in common e.g. friends, OBs/OGs, workmates, etc. This will ensure that the members get along well. The group should also have a diverse skill set and different backgrounds. It should also be gender balanced.
5. The group should have a written investment strategy to guide them in their operations.

The investment strategy of the group will be determined by the following:

1. What are the Goals and Objectives of the Investment Group?
2. How much funds are available for Investment?
3. What is the risk profile of members and the Investment Group?
4. What is the expected return of investments?
5. How long should we invest for?
6. Do members have the skills/time/experience to manage the investments?

Depending on the answers to these question there are various investment options available to the investment group. Investments fall into two broad asset classes – growth and defensive.

Growth assets. Growth assets are designed to grow your investment. They include investments such as shares, alternative investments and property. They tend to carry higher levels of risk, yet have the potential to deliver higher returns over longer investment time frames.

Defensive assets. Defensive assets include investments such as cash and fixed interest. They tend to carry lower risk levels and, therefore, are more likely to generate lower levels of return over the long term. Generally, defensive assets are expected to provide returns in the form of income.

The basic asset allocation ratio I would recommend is 50:50 between growth and defensive assets. However depending on the risk profile of the members this can move anywhere from 30:70 to 70:30 for the defensive and aggressive investor respectively. It is important to re-balance the portfolio on an annual basis.

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