Investing with friends might 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.
What To Talk About Before You Invest With Friends
Before pooling resources, it may be a good time to talk a little about how you each approach the market.
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 the investment as a way to diversify their portfolio.
It can also be a good time to talk through all the what-ifs you can think of, including:
• What if this investment loses money?
• What if one of us needs the money for an emergency?
• What if more people want to invest in the future?
And 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 Invest With Friends
There are a few different ways to invest with friends.
Set Up a Brokerage Account
The low-touch way to invest with friends is to designate someone as account holder and have them open a brokerage account with the pooled resources. But that method may not allow for safeguards to protect your capital or empower each individual investor with decision-making power.
Recommended: How to Open a Brokerage Account
Start an Investment Club
Another option is to start what’s called an investment club. Depending on the circumstances, the club may have registration requirements so the SEC can regulate the club. Circumstances can vary by state. Some circumstances include having passive members who do not decide how the money is invested (ie, if partners or spouses input money but are not involved in investment decisions) or if there is a member providing investment advice or making investment decisions on behalf of the group. Because securities laws operate on both the state and federal level, it may be a good idea to make sure everyone fully understands state and federal regulations.
In some cases, an investment club may have to register with the SEC as an investment company. And someone who takes the lead on investment decisions without input from all members may also need to register with the SEC as an investment advisor. Your club also may need to write bylaws, create a legal partnership, and set up any necessary software.
Better Investing , a national nonprofit, has resources and sample club materials you can peruse to see if an investment club may be right for your friends.
Start a Casual Investing Club With Friends
Some people find investing with friends easier when they’re not actually poolings funds. There are investment clubs where members share experiences, invite financial advisors to speak, and otherwise talk portfolios—without sharing money and making joint investment decisions. This can be a way to dip your toe into the world of investing with friends, or help expand your knowledge on popular investment trends, like cryptocurrency or impact investing, that you’ve been curious about but have not yet had a chance to explore.
An investment club that does not have financial commitment can also be a way to assess whether your group of friends is ready to take the next step and explore investing as a group. While some people hold their financial moves close to their chest, others find freedom in talking through what does and does not work for them.
People who find value in talking through financial moves may find this sort of investment group a valuable resource that still allows them to keep control of their money and have the ultimate say in any financial moves they may make.
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) for the purpose of raising and investing cash, as well as to make 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.
Some people see the benefits in investing with friends: the shared wisdom and experience, the mutual financial goals, and in some cases the pooled funds that may result in profitable returns.
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, there are other ways to enjoy that group dynamic while retaining full control of your money and your financial decisions.
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.
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