Proceed Cautiously When Starting an Investment Club With Friends

You might start by sharing investing ideas before pooling your cash.
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A group of friends and I are putting together an investment club. We each will put in $200 a month and, as a group, decide on stocks to buy. How should we set up the group? What advice could you give us in terms of getting started? What information would be useful to learn more about stocks? -- Shane Green

Shane,

If you want to keep your friends, it might be better to share a pizza with them instead of your financial assets.

Perhaps I am being overly cautious. If you are just starting to invest, you may want to refrain from pooling your assets with your friends, at least while you are in the nascent stages of your education.

Some families and friends shouldn't do anything together that involves money. Some people get emotional when they get stuck with a bar tab. Can you imagine the caterwauling if

America Online

(AOL)

dropped 30% in one day? And you might have to contend with a situation in which one or two members will dominate the club's decisions. That would be no fun.

Rather than pooling your money at first, perhaps you and your friends should start meeting once a week to share your investment ideas, like one of those ever-popular book clubs. By simply meeting every week, you can experience some the same benefits of an actual investment club, such as the knowledge from others and constructive discussions.

But if you are still interested in collectively investing with your friends, there is one place to learn how to establish an investment club: the

National Association of Investors Corp.

, NAIC for short.

This nonprofit organization for investment clubs and individuals, based in Madison Heights, Mich., can tell you everything you need to know about founding a club. And (ta-dah!) the association has a Web site at

www.better-investing.org.

There are numerous steps you'll need to go through, including adopting a partnership agreement and electing officers.

The NAIC's site includes a

list of those steps for setting up a club. The organization does suggest that you buy the book

Starting and Running a Profitable Investment Club

to read, but the site still offers plenty of useful and free information.

The

Internal Revenue Service's

Web site also has a

section outlining tax considerations for investment clubs.

You certainly will reap rewards from establishing an investment group, either formal or informal. You can learn how to analyze a stock, build a reasonable basis for buy and sell decisions and evaluate your performance relative to an appropriate benchmark.

But if you do decide to pool your money with your friends, be sure to limit your contribution to 5% to 10% of your investment assets. An investment club is not the place for your retirement assets.

If you are looking for other online educational resources, start with

TheStreet.com's

Basics section, which includes information on fundamental analysis and other subjects appropriate for new investors. You may also want to examine the

list of favorite financial sites named by

TSC

readers.

Send your questions and comments, along with your full name, to

deardagen@thestreet.com.

Dear Dagen aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.

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