Developing your club's investment strategy

It is important at the outset for a club to establish criteria for investing. While it is inevitable that there will not be complete agreement on every aspect of the club’s investment strategy there needs to be consensus between members as to the broad approach the club will take. The National Association of Investors Corporation (NAIC) research suggests that those clubs that fail within the first eighteen months often do so due to conflict between members who are long-term investors and those who believe in short term, speculative trading.

A common investment philosophy is a prerequisite of a successful club. Some of the issues you will need to consider are:

What products will you invest in?

Many investment clubs invest only in shares. However there are other products traded on ASX, including:

It may be that initially you decide to focus solely on shares. Once you have built up a portfolio of share investments, you may then consider one or more of the above. The products you intend to invest in should be specified in the Partnership Agreement. So as not to limit future investment possibilities, you may decide on something as broad as ‘listed securities’, rather than ‘shares’. This means you are not precluded under the Partnership Agreement from products such as those listed above.

Short term trading vs. long term investments

Do you intend to take a buy-and-hold approach, or to trade your holdings on a regular basis? Given that you will probably be meeting as a group only once a month, a high frequency trading approach is impractical. Day trading, for example, is out of the question if all members are to have their say in investment decisions.

Most clubs take a longer term approach to their investments, but may also have in place a mechanism for taking investment action between meetings if trading opportunities arise. See What happens between meetings?

Risk profile

Do you intend to invest only in blue chip shares, or to take a speculative approach? Many clubs try initially to build a portfolio with a strong base of blue chip investments before considering more speculative shares. At the outset you may decide to limit yourself to companies in the S&P/ASX200, for example.

It is important to strike a balance that all club members are comfortable with.

Investment criteria

How will you evaluate one investment possibility against another? Do you intend to base your decisions on fundamental analysis or to take a technical analysis approach?

  • Unless your group is made up of members with a particular interest in technical analysis, it is likely that your decisions will be made on the basis of fundamental analysis. If this is the case, you will need a method to measure the merits of one suggestion against another. Specific criteria you use may include comparing long-term profit percentages, turnover increases, dividends and borrowings.
  • To help you evaluate potential investments, you may consider using the Share appraisal form which sets out some of the factors you might want to take into account when researching potential investments. Note that there is a wide range of resources available to assist you in evaluating potential investments – this is just one you may find useful.

Other considerations

There may be other criteria you want to include in your club’s investment approach. Some clubs for example, exclude from consideration tobacco companies or companies with interests in gambling. If you decide to make consideration of a company’s ethical standing part of your investment deliberations, your club meetings are likely to involve some lively discussions, so it is best to clarify whether this is an important criterion at the outset.

Next topic: Share appraisal form