Stock investment clubs can help new investors find quality stocks and develop their own investing style. But watch out for the drawbacks.

Learning about stocks is as easy as connecting to the Internet. But if you want to further your knowledge of investing, you may find that there are some advantages to joining one of the many stock investment clubs around. However, finding successful investment clubs is key.

As a relatively new investor, you could learn a fair amount about the basics of investing. But there are drawbacks.

Stock investment clubs can offer social and educational benefits. Successful investment clubs can be a good place to learn about trading stocks if you think that you would feel more comfortable learning about investments with others. And some clubs may let you invest as little as $50 a month, for example.

But stock investment clubs, even successful investment clubs, can also have hidden risks that can hurt your profits. That’s because they make decisions by committee. As with all collective initiatives, responsibility for mistakes is diffused. And when committees make mistakes, they sometimes make big ones.

In addition, even successful investment clubs can produce unexpected personality clashes and unfortunate peer pressure. What’s more, decisions formed by group consensus sometimes take on an air of legitimacy and urgency that can ultimately cost members a great deal of money.

Here’s how you might be drawn away from a solid investment strategy in an investment club.

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Stock investment clubs: Learn about stocks—but avoid themes, fads and other unsound approaches to investing

Let’s say you join stock investment clubs that pick up on one or several investment themes or fads. You could feel pressure to do the same with your personal investments. (The risk with theme investing is that you could let the theme or fad become your overriding investment consideration—and that could distract you from other measures of value and risk.)

Or your choice of stock investment club could invest in ways that we would not recommend. For instance, its members might prefer a sector rotation approach (where you underweight or overweight your holdings in certain sectors based on a forecast of the stage of the economic cycle, or other factors) or rely too heavily on technical analysis.

I would strongly advise that you look for an investment club that follows a reduced-risk, conservative strategy like ours. It will be better aligned with successful investment clubs of the past.

The best way to learn how to invest in stocks with less risk within the framework of an investment club is to join one of the successful investment clubs whose philosophy has something in common with our three-part investing strategy. At TSI Network, our approach is to invest mainly in well-established, dividend-paying companies, to spread your money out across the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities); and to avoid or downplay stocks in the broker/media limelight.

With this approach, you can avoid overloading yourself with stocks that are about to slump because of industry conditions or changes in investor fashion. You also increase your chances of happening upon a market superstar—a stock that does two to three—or more—times better than the market average.

In addition, if you are looking at stock investment clubs, make sure that in the initial planning the group carefully creates and follows a partnership agreement and organizational by-laws. The better organized the club is, the more advantages you are likely to realize as a member.

What is a blue chip stock?

The New York Stock Exchange defines a blue chip as high quality stock in a company with a national reputation for quality, reliability and the ability to operate profitably in good times and bad. The problem is that “reputation” plays a key role in the definition.

Many companies acquire a blue-chip reputation by displaying the qualities that the definition suggests. Others get it through a strong public relations effort or by being in the right industry or business situation at the right time and place. Regardless of how it got there, this blue-chip label sticks with companies long after they quit living up to it.

You can still look at blue chips as the strongest and most secure stocks on the market. Just be sure you look at the stock’s qualities and not just at the label.

We continue to believe that investors will profit most—and with the least amount of risk—by buying shares of well-established, dividend-paying stocks with strong business prospects. Download this free report now to learn how to find the best stocks to invest in.

These are companies that have strong positions in healthy industries. They also have strong management that will make the right moves to remain competitive in a changing marketplace.

Stocks like these give investors an additional measure of safety in today’s volatile markets. And the best ones offer an attractive combination of low p/e’s (the ratio of a stock’s price to its per-share earnings), steady or rising dividend yields (annual dividend divided by the share price) and promising growth prospects.

Has the pandemic spurred your interest in investment clubs? More broadly, what are your thoughts on investment education tools like clubs and practice accounts? How many successful investment clubs do you know of?

This article was initially published in 2015 and is regularly updated.