To the uninitiated, it is not always obvious how to go about forming and organizing an Investment Club. When starting an Investment Club, there are a few basic steps to be considered. This article attempts to ease those concerns. Below are some recommendations and tips for forming and running a club.

First, talk to friends and family and find out who might be interested in pooling some funds together to manage and as well pitch-in to share in running the club. You might start by using the tools here at InvestingMinds to help you network with and solicit the interests of friends and family in forming an investment club. As well, if you feel starting a new investment club is beyond your current interest, you might want to consider joining an existing club (How do I join an existing Investment Club?)

When first getting started, it is a good idea to have some general information to distribute to prospective members.  Include such information as the benefits of joining an investment club, a description of the club and what it is all about, and what new members can expect from joining a club.

You will want to hold an orientation meeting for interested participants and be prepared to assess the group’s chemistry and determine whether or not there is a strong enough commitment. Be prepared to cover subjects such as, how the club will be organized and run, member goals and objectives, benefits of membership and level of commitment.

Prior to holding the meeting you will want to brush up on club structures and legal entity. It is important to agree on how you will be organized legally and operationally. Investment clubs are generally formed as general partnerships, but could also be formed as limited liability companies or limited liability partnerships (in states that allow them). While an investment club could incorporate, the double tax treatment on corporate distributions makes the corporate structure less desirable than a partnership. Typically, a general partnership does not generate any tax liability on its own; instead, any tax liability is passed through to members each year. Investment club partnerships must file Form 1065 and Schedule K-1s with the IRS each year, and with states that require partnership filings. Investment club accounting software can facilitate the management of a club’s books and the preparation of tax filings. The NAIC guide includes sample legal language for contracts and agreements. Don’t neglect the paperwork issue. Failure to organize as a legal entity and complete the necessary paperwork, will result in far more headaches than the time it takes to do the work. You can start out by looking over the sample partnership agreement supplied by the NAIC.

Other matters to consider before forming a club. Do all of the members have realistic risk and return goals? If someone wishes to double their investment in two years, and do it on margin, this may prove to be impractical and out of sync with the rest of the members. Although everyone comes to a club with different ideas of what constitutes a good investment, it is important to set down some general guidelines for constructing and managing the portfolio. It’s usually a good idea to have some common basis regarding a general investing philosophy and approach.

If after meeting with prospective members of the club, and all agree to move forward, then it is time to start thinking about specifics regarding club operations. You will want to establish a regular meeting time, place, length, and format. As well, outline the various items of business you plan to cover at each meeting and allocate an amount of time for each. You may wish to assign a chairperson for each meeting and agree on a set of individual responsibilites. Who will be the officers of the club? What will be their responsibilities? What are the non-officer member’s roles and responsibility (Q&A, research, topical discussions, bookkeeping, hosting, education, etc.) You will need to think about on what terms will new members be allowed to enter the club and how to handle the departure of existing members.

How much money is needed to get started? Most clubs operate on the basis of making a monthly contribution. There should probably be some agreed upon minimum monthly contribution with the ability to exceed this amount if desired. Additionally, you may choose to start with a minimum lump sum contribution and see how it goes managing these funds. You may choose to have a regular contribution schedule on top of an initial funding to start the club.

What is an ideal number of members? Typically, club sizes do not exceed a dozen or so people due to the physical limitations of being able to hold a meeting in someone’s home, or say a coffee shop or restaurant. However, with the virtually unlimited space of a “virtual conference room” it would not be unrealistic to have a membership grow to a few dozen or more members. Thus, it would only make sense to include an online presense in your club format to deal with membership growth, convenience and expediency.  At InvestingMinds, it is easy to create an online investment club. Using the club formation tools within Investor Community, just follow the directions for setting up a club (create a club).

There are many good books and references that are relevant to club investing. Some suggested readings might include Peter Lynch’s One Up on Wall Street, Beating the Street, and Learn to Earn, Robert G. Hagstrom’s The Warren Buffet Way, and Graham and Dodd’s The Intelligent Investor as good places to start. In addition to the books referenced earlier, you might want to consider these helpful guides to organizing and running an investment club, Davis and Thorsell’s Starting and Running an Investment Club: Recipes for Success and Marsha Bertrand’s Getting Started in Investment Clubs. Lastly, running an investment club meeting is not unlike running a board or committee meeting. Although it may seem overly formal to consider such measures as adopting Robert’s Rules of Order for running an investment club, you can never be too careful when managing yours and other peoples money in a committee or group setting. Thus, the President or Chairperson for the club should be familiar with the rules for running group meetings and have enlightened all members to the needs to follow such rules. Some references to consider on the subject are Robert’s Rules in Plain English 2e: A Readable, Authoritative, Easy-to-Use Guide to Running Meetings (Robert’s Rules in Plain English) by Doris P. Zimmerman and Robert’s Rules for Dummies by C. Alan Jennings.

What is a typical organizaton structure for a club?

Typical clubs have[1]:
· A president/presiding partner, who sets meetings, presides over them, and plans activities.
· A vice president/assistant presiding partner, who fills in when needed and might also run the education program.
· A financial partner/treasurer, who deals with the brokerage, buys and sells stock, and keeps records of the club’s holdings as well as each member’s share. (This needs to be a careful, detail-oriented, and responsible person.)
· A recording partner/secretary, who keeps minutes of each meeting, reminds members of meetings when necessary, and possibly mails out minutes to members who miss a meeting.
· Some clubs have a separate education officer, responsible for planning (with the input of the group) an educational program, which might include presentations, field trips, guest speakers, and assigned reading.

Investors often have questions about choosing a broker to execute their orders. First, we would recommend avoiding “full-service brokers” unless of course the club includes such a broker who is willing to offer the services of his firm at a significant discount. Instead, we prefer to use discount brokers. Using a full-service broker essentially defeats the purpose of forming a club…benefiting from the work and collective efforts of the group rather than relying on the advise of a broker. Since clubs are self-reliant and self-directed, there is no need to pay hefty commissions to full-service brokerages. Consider taking advantage of the incredibly low commissions offered for by discount brokers. Buying and selling shares online can cost as little as $8 or less per trade. Visit the InvestingMinds’s Discount Brokerage Center (Coming Soon!) for more information about how to evaluate and choose a broker. You can actually sign up for an account there, too!

Typically, Investment Clubs meet with their membership on a regularly scheduled basis (once or twice a month) to discuss strategy and investment performance. In addition to holding informal get togethers, it is also practical to incorporate an online presence into your club. Often busy schedules and the inconvenience of meeting in a physical location can make connecting and conducting meetings in cyberspace more practical. Thus, given the hyper-speed pace of the marketplace, and the impact that rapid decision-making can have on portfolio performance, adding online club capability to any investment club is an important requirement for efficiently managing an investment portfolio in today’s digital economy. At InvestingMinds, we make it easy for you to organize and conduct meetings, research investments, communicate with members, network with other clubs, and manage your investments all at the click of a mouse. (For more information, see How does joining InvestingMinds benefit our Investment Club?)

Education is an important aspect of the investment club experience and a reason why we have developed on the site what we believe to be one of the best and most extensive financial education resources for investors. We would encourage you to nominate an education officer who will be responsible for planning an educational program, which might include presentations, field trips, guest speakers, and assigned reading. Some skills required on the road from amatuer to sophisticated investor might involve learning how to read an annual report, calculating financial performance ratios, and understanding various stock valuation methods. You can learn more about these basic skills by clicking on the link or visiting the InvestingMind’s Investor Resource Center.

[1] “Starting and Running a Profitable Investment Club,” Thomas E. O’Hara and Kenneth S. Janke, Sr., Three Rivers Press, New York, NY.

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Note:  To create an online investment club, visit (Create A Club) at InvestingMinds.

The opinions and views expressed in this article do not necessarily reflect the views of InvestingMinds.   InvestingMinds did not prepare and does not endorse such content.  Please note that this document is intended for general circulation only and the recommendations contained herein do not take into account the specific investment objectives, financial situation or particular needs of any particular person. This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy securities or other financial instruments.  No part of this document may be reproduced in any manner without the written permission of InvestingMinds.

This entry was posted on Monday, May 7th, 2007 at 1:26 pm and is filed under Clubs/Groups. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site. Permalink.