Investing with friends can seem like an intriguing concept. Instead of being the sole decision maker, you can share financial and knowledge-based resources to come up with a compelling investment strategy that serves your collective goals.
Investing with friends may also be a way to make a substantial impact in a cause you believe in, such as raising funds to invest in a friend’s startup or business venture.
And investing is something you’re likely already using as a way to connect. According to SoFi’s research, 70% of SoFi Invest members talk about investing with friends, family, or colleagues at least once a week. So it might make sense to some people to pool that passion and capital and begin investing together.
Of course, investing with friends also comes with some particular concerns you’ll want to consider in advance:
• Who controls the investment account and how are investment decisions made?
• What is the process if one person wants to remove their portion of the investment?
• How will any returns be distributed?
• Does the investment have a set length of time, or will it continue in perpetuity, or until all parties have decided to withdraw or buy out their investment?
Talking through scenarios like this can be helpful. It can also be helpful to come up with some sort of contract that outlines contingencies, so you know everyone is on the same page.
Pros and Cons of Investing With Friends
There are a number of upsides to investing with friends, but also some reasons to be cautious.
|Friends can enjoy trust and similar POVs||Friends may rely on an honor system rather than proper procedures|
|May be able to reach compromises more easily||Strong emotions can lead people to make impulsive money choices|
|Friends add enthusiasm and support|
When you invest with your friends, you enjoy a certain amount of trust and, often, similar values and perspectives on life. This can make it easier to explore new opportunities and set goals together.
Friends may have the ability to overcome disagreements and reach necessary compromises — a big plus when it comes to managing money.
Last, friends can cheer each other on, and pool enthusiasm as well as funds to generate momentum, and sustain commitment.
On the flip side, being friends sometimes leads people to rely on a “handshake” or honor system for doing business, rather than setting up proper protocols, paperwork, and protections.
This is understandable — you want to believe your friends have your back in all cases — but financial endeavors often function better with firewalls in place. That’s because, as much as you may like your friends, they’re only human. They may drop the ball, forget important details, or put their own interests ahead of yours.
In a similar vein, the camaraderie of good friends can generate a lot of enthusiasm for certain ideas or investment choices. But when it comes to money, as many behavioral finance studies have shown, emotions around money can lead people astray. It’s usually smarter to have a few guardrails in place, to guide any group.
What to Talk About Before You Invest With Friends
Before pooling resources, it may be wise to talk a little about how you each approach investing.
Maybe one friend is a Warren Buffett aficionado, while another is eager to invest in crypto.
Maybe one friend is eager to hit a specific financial goal while another is looking at investing with friends as a way to start an investment club to diversify their portfolio.
Before pooling resources, it’s a good idea to talk about how you each approach the market.
It can also be a good time to talk through all the what-ifs you can think of, including:
• What if our investments lose money?
• What if one of us needs the money for an emergency?
• What if more people want to invest in the future?
Finally, make sure your goals are aligned. Are you looking for specific investment opportunities?
Some friend groups get together for what is called impact investing, or socially conscious investing — investing in companies that have positive social, environmental, and environmental impact on the world.
Other friends may pool their money to gain access to investment opportunities that may have a minimum investment threshold, such as private investments and alternative investments like venture capital.
Once you’re all on the same page, you can then assess different methods of investing as a group of friends.
How Do You Start Investing With Friends?
There are a few different ways to start investing with friends.
Set Up a Brokerage Account
One way to invest with friends is to designate someone as the account holder, and have them open a brokerage account online with your group’s pooled resources. But that method may not allow for safeguards to protect your capital, or empower each individual investor with decision-making power.
Opening a brokerage account for your pooled funds may work for groups where there is one designated, trusted leader who manages the execution of trades, and where everyone involved agrees about the group investing style, whether active investing or some other strategies.
💡 Recommended: How to Open a Brokerage Account
Create an LLC
You may also choose to invest with friends as a show of faith for a mutual friend or family member’s startup or business venture. In this case, it can be helpful to create a limited liability company (LLC). And LLC can provide a structure for raising and investing cash, as well as making sure there is an agreement laid out as to potential returns on the investment and whether investors will have any power in the direction and decisions the company makes.
In creating an LLC, it may be helpful to seek legal advice to help create a contract so that everyone is on the same page and there is no confusion as to how money is used and what the return on investment will look like for investors.
Investing in Real Estate With Friends
Real estate can be expensive, so pooling your resources with friends may make sense.
There are a number of different ways to invest in real estate with friends. Among the most common:
• You might buy a long-term investment property, like a rental property.
• You could buy a short-term investment property, where you renovate and flip a home, for example.
• You could invest in a shared property where you and your friends live, or a property where one or more friends might live, with an agreement to sell it at a certain point, ideally for a profit.
However you approach your joint real estate venture, be sure to do research into the different types of business arrangements and real estate agreements that might suit your aims. Given how expensive and complicated real estate can be — even owning a shared home — and how many legalities could come into play, it’s best to get professional advice.
Investing in a Friend’s Business
While history abounds with successful businesses started by friends, think carefully before investing your own funds in a friend’s new venture. Ideally, you want to approach the question of whether to invest in your friend’s enterprise with your business hat on, so to say.
• Wait to be asked. Just because your friend is on fire about their new startup doesn’t mean they want you or your money involved. If they ask for your advice, rather than money, that could be a lower-stakes way to provide support.
• Kick the tires. If your friend does want you to invest, pretend you work on Wall Street. Read their business plan. Ask hard questions: how they’re raising capital, what kind of audience they’ve identified, and so on. Before deciding to put your own money into a project, you want to know it’s solid.
• Sign on the dotted line. Don’t attempt to do business with friends over a beer and a handshake. Lay out all the terms and expectations in a contract that protects all parties.
• Set emotional boundaries. You’re friends first, so have some rules in place that help you navigate when and where to talk business.
For many people, there are tangible benefits to investing with friends: shared wisdom and experience, supporting each other’s financial goals, and in some cases the profits that may come from your joint venture. But there are disadvantages as well. It can be tempting to trust friends to do the right thing, when having a contract might provide more structure and clearcut consequences if an investment project goes awry.
There are many things to consider before investing with friends, and many different ways to go about it. In some cases, you might want to create an LLC with friends, to safeguard your own interests and make sure everyone is in agreement on the details of the arrangement.
If you’re not quite ready to invest your money directly with other people, and you want to gain more experience and wisdom on your own, you can start by actively trading stock with SoFi Invest.
SoFi’s investing platform has a feature available for Active Investing members that allows them to opt-in to share their investment portfolios, so you can see how your friends are doing and the market moves they’re making. Dollar amounts are hidden, but you can follow the holdings of friends who also have opted-into this feature, look at watchlists, and comment on trades.
You can also see you and your friends on a dynamic leaderboard with other members. This is a seamless way to see your friends’ investing behaviors, ask questions, and connect on investment decisions — while still keeping your finances separate.
Is it a good idea to invest with a friend?
Investing with friends can offer some distinct advantages, including the power of combined finances, similar values, and basic trust. On the downside, though, friends might be tempted to do business with a handshake, rather than spelling out details and expectations clearly in an agreement or contracts that protects everyone involved.
Can a group of friends invest in stocks?
Friends can invest in stocks together in a few different ways. A set of friends can form an investment group or club, where they pool money and agree on a stock-picking strategy. It’s also possible for friends to invest in fractional shares.
How do I start an investing group with friends?
There are many different books and websites that can offer steps and guidelines for setting up an investment group with your friends.
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