Socialize and Earn: How to Start an Investment Club

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Investment clubs are popping up all over the country and little wonder: Investing as a group is much more easy and fun than investing alone. Whether you’re just starting out as an investor or have been investing for years, investment clubs provide the following advantages:

  • Risk is spread throughout the group. By diversifying your investments, you minimize your risk of losing all your money on just one or two investment vehicles. By investing at regular intervals throughout the year (i.e., dollar cost averaging), you reduce your chance of buying an overpriced stock, property or other commodity.
  • Members are better informed. As evidenced in my stock investment article series, sound investments take a long time to fully research. Having extra members to assess financial documents such as the income statement and balance sheet can save time and result in everyone having more information about a company, franchise, etc.
  • Emotional investing is minimized. You won’t be able to justify your investment choice to other club members      by simply stating “I have a good feeling about this one.” As a result, you’ll also minimize making impulsive investment decisions.
  • Investing discipline is maintained. Most investment clubs require that their members make a monthly contribution. This forces you to regularly set aside and save some money every month.

So, how do you start an investment club? Here are the basic steps:

  1. Select your members. Do you know several (online or other) friends or relatives who have mentioned investing and who are responsible with their money? If yes, then these individuals could be valuable members in your investment club. Try to pick individuals who would be willing to dedicate their time and their money to an investment-focused group and meet their commitments faithfully month-to-month. Otherwise, your investment club will simply become a social club (and probably serve beverages of a refreshing nature, à la Homer’s Hunting Club).
  2. Decide on your club’s size and geographic range. Investment clubs can be small (fewer than 15 members) or large (more than 15 members) and local or online. There are advantages and disadvantages to each club type. For example, a small local club can get business done quickly and easily and have lots of face-to-face contact. The disadvantage of this approach is that every member may have the same, narrow investment viewpoint. Alternately, a large online club offers its members many different investment viewpoints and a wide range of experiences. The disadvantages with this type of club are that virtual meetings may seem impersonal and full member attendance will almost never occur.
  3. Decide your club’s investment vehicle(s). Your club could focus solely on stock investments or diversify with real estate, person-to-person loans, mutual funds or some other investment vehicle. Deciding on your choice of investment now will determine if your club needs to open a brokerage or other account type later.
  4. Name your investment club. Giving your club a name should take some time and effort and be agreed upon by all its members. The name of your investment club will also be used on its bank account, member statements and tax reports, so make sure it’s a name that you and your club members can all agree on.
  5. Draft and sign a partnership agreement. For business as well as federal taxation purposes, you will need to draft a partnership agreement and have all club members sign and date it. The partnership agreement should contain the club’s formation date, fiscal year and profit/loss sharing structure. Member initiation and termination rules should also be included here. Sample partnership agreements are located at iClub.com and TechRepublic and can be used as templates when creating your own club partnership agreement.
  6. Draft your club’s constitution and rules. Your investment club’s constitution and rules need to be carefully considered and stated in order to protect it from being audited by the IRS or even sued by a disgruntled member. Be sure to include the following items in your club’s constitution and rules and have all members sign and date the document:
  • Number of allowed members, including new member initiation procedures and requirements.
  • Number of officers, election rules and service terms.
  • Required monthly contributions from all members.
  • Bank account details such as the account’s purpose (e.g., to collect member dues and club income) and signatories (i.e., who can write and cash checks).
  • Brokerage account details such as the authorized investor/trader and investment/trading rules.
  • Member voting powers and expectations as well as what voting percentage constitutes passage of a motion.
  • Grounds for member expulsion.
  • Monetary procedures following member expulsion, resignation or death.
  • Tax collection and procedures.

A more complete guide to generating your club’s constitution and rules is located at TimetoTrade. You can also use this guide as a template for your own documents.

  1. Elect club officers. Decide who will fulfill the roles of president, vice president, treasurer, secretary and designated investor/broker. Typically, the president or vice-president calls the club to order and makes announcements. The treasurer is in charge of collecting member contributions and filing forms with the IRS. The secretary records meeting minutes and attendees and later distributes this information to all members via mail or email. The designated investor/broker holds the account in the club’s name and makes the actual investments/trades. Additionally, there may be a designated auditor who is not an officer and audits the club’s accounts.

Next week’s article on starting your own investment club will include information on obtaining a federal tax ID number, registering your club with the state, and opening bank and brokerage accounts in the club’s name. There will also be some tax tips on how to report your club’s earnings once members start paying their dues and actually investing.

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2 Comments

    1. I would recommend that anybody considering joining or forming an investment club first read “Four Pillars of Investing” by William Bernstein. I have been involved with two investment clubs with fairly intelligent people. Unfortunately personalities frequently win over discipline and domestic growth stocks seem to predominate (based on the NAIC model).

    2. Halina Zakowicz says:

      Thanks for the recommendation, Doug! It’s too easy to get suckered into buying the newest snazziest stock that everyone seems to be talking about.

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