Nov 30
Investment Clubs: Why do they underperform the market?
How many of you belong or have ever belonged to an investment club? I’ve been an active part of two, advised others, and helped to start one more. Why do clubs continue to under-perform the market? There must be a myriad of reasons, but I will focus on a few experienced by the clubs to which I belonged.
1) Investment clubs, when they first begin, are largely made up of beginning investors who don’t know what they are doing. Despite going to national meetings and using software designed to provide guidance, the results continue to under-perform market measurements such as Vanguard’s Total Market Index – the VTSMX.
2) Investment clubs build their portfolios through the effort of selecting individual stocks. This is a big mistake as the mathematics (arithmetic according to Sharpe) show the odds are not in the favor of investors who build portfolios through stock selection.
3) Of club portfolios I’ve been able to see, most are not well diversified and this hurts overall performance.
Many clubs do not have a clue as to how poorly they are performing. Fortunately, in late 2000, a service began to provide this essential information.
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