How to Start a Investment Club

Advances in communication technology have made it easier for individuals to manage their own investment. Doing this alone, however, still tends to require a greater time commitment than most are willing to devote. By joining with other investors in an investment club, individuals gain the insight of other members and the increased earning potential of a larger capital base. Investment clubs have existed for centuries and can be configured in multiple ways to create a customized situation of mutual benefit.

Difficulty: Moderately Challenging

Instructions

Things You'll Need:

• A meeting place
• A brokerage or trading account
• Access to IRS forms

1. Recruit members for your club. Begin with friends, friends of friends and other professional associates who may be interested. Ideally, an investment club will have a variety of members with diverse perspectives and insight. Members need not be experienced traders or investors, but should be able to meet the capital requirements of the group. Too many members might be difficult to manage, but too few might not offer significant advantage.

2. Establish compatibility. Business is business and, at the very least, people who enter an investment club as friends should stay friends. Even if you will take the lead role in organizing and managing the club, use a democratic process to make sure everyone’s opinions are heard and interests addressed.

3. Establish procedures. All members should agree to regular meeting times and regular contributions to the club, generally monthly, and to the investment goals of the club. The club’s goals should be matched to a corresponding investment style. All members should agree on how investment decisions will be reached, implemented, and how any of the procedures can be changed in the future, if desired. Some members should be designated as officers, such as president, vice-president, treasurer and secretary.

4. Know the law. For federal tax purposes an investment club can be treated as a partnership, but can also elect to be taxed as a corporation or a trust. In most cases this will involve the creation of an Employer Identification Number (EIN) and the filing of IRS forms. Forms for contracts and other formal agreements are generally available online. The legal designation of the investment club will determine how members can access capital gains from the club and how taxes on those gains will be paid.

5. Assuming there are still interested parties after all of the above is accomplished, someone will need to create a trading account for the investment club. Most brokerages offer group accounts and have specialists available to assist with the paperwork. Only after all the foregoing is accomplished should anyone contribute actual funds to the investment club.

Tips & Warnings

• While making money is the core goal of the group, don’t discount the importance of having fun. Making the meetings interesting and encouraging all members to participate will keep the group together longer. Growing wealth takes time and there is no reason why your group can’t have a good time in the process.
• Delegate authority, but have backups. Most brokerage counts and corporate structures can be devised so more than one person has authority to execute investments. While this will help guard against a self-interested member, it will also protect the club in case of the unexpected incapacitation of a key member.
• Don’t rely on the group, or don’t put all your eggs in one basket. While the investment club may prove to be a fun and profitable endeavor, don’t make the investment club your sole source of savings or investment. Encourage all members to continue funding their savings, 401k or retirement accounts and to calculate their contributions to the club in addition to these other investment options.
• Don’t do too much yourself. Unless you’re an experienced and confident investor willing to make the investment club your sole occupation, delegate responsibility so no one member feels too much of the strain. Too much stress will adversely impact the ability of a club member to carry out their duties effectively. But, if you really want to do everything, make sure the members know this and approve.
• Avoid “style drift.” Unless the membership has approved a change in investment approach, monitor positions and trades for style drift, or a gradual move away from the original intention of the position. Perhaps a stock chosen for its dividend yield is at risk of cutting its dividend. Or maybe the ability of a growth stock to expand its business is peaking. Buy and hold is not the most profitable investment technique and the group should balance being active in maintaining a portfolio that matches their goals while avoiding over-management that can run-up brokerage fees and create unwanted risk.
• Don’t skimp on the paperwork. As a legal entity, documentation will be the lifeblood of your investment club. In fact, paperwork should be a responsibility delegated to at least one person in your group. In addition to founding documents of the investment club, paperwork includes trade confirmations, tax documents, profit/loss statements and communications from your broker.

Resources

• Investment club information on the SEC website
• Details about investment clubs and taxes
• Better Investing website

[nccu9902]

on 10/17/2009 Great article!!! 5* and recommend