Investment clubs are an intriguing method of investing your money.
Whether you’re a group of experienced brokers and traders wanting to increase wealth collectively, or a college fraternity. Creating an investment club is a viable option as you’ll learn different investment strategies and can brainstorm unique ideas.
They are basically groups of investors who desire to create an investment portfolio with specific goals. It all stems from the concept that “two heads are better than one” when it comes to beating the market.
There are many places you can create investment club brokerage accounts to buy and sell stocks, bonds and options. So it’s best to shop around and find the one that best suits your group perfectly.
Investment Club Pros and Cons:
With all things, before considering joining one of these clubs, it’s important to consider the pros and cons:
(1) – If you are a low-income investor, joining an investment club can help you build wealth in an affordable and easier way.
(2) – Investment clubs can invite guest speakers from experts in financial matters or other industries increasing the educational benefit to each member.
(3) – There are a wide range of investment clubs out there (even real estate investment clubs), so you have the ability to invest in your preferred type of asset.
(1) – If the market crashes, it’s possible that some club members will want to leave. This complicates the structure and limits any future potential of profit.
(2) – Investment clubs are on the decline. According to BetterInvesting.org (formerly known as the National Association of Investment Clubs), these groups have decreased from a high of 400,000 in 1998 to 39,000 in 2012.
(3) – Also, according to a study by Brad M. Barber and Terrence Odean, 60 percent of investment clubs under-performed the market by 3 percent annually between 1991 and 1997.
The average return of investment clubs over that period was 14.1 percent; individual investors returned 16.4 percent, and the index returned 17.9 percent. They obviously would’ve fared better just investing on their own.
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Investment Club Rules
In order to operate an investment club, there are general rules you have to follow:
For instance, to avoid having to register with the Securities Exchange Commission (SEC), you cannot publicly announce or advertise that membership to your club is available (i.e. make a public offering of your securities). Also, your club must not have more than 100 members.
Additionally, as long as everyone in the club is actively voting on which investments to make and no one person is managing the funds (i.e. acting as a financial advisor) then no one has to register.
General Partnership Recommended
Besides that, it’s a good idea to form a “general partnership” so that it’s legally binding that each member will equally share the profits and suffer the losses. And since investment clubs are businesses, you’ll all have one brokerage account to buy and sell limiting trading costs. Also, normally there’s an agreement where it can be established that each individual has equal management authority within the partnership.
When it comes to taxation, a general partnership isn’t double taxed like a corporation. Corporations would normally pay taxes on income as well as dividends paid out to shareholders. Instead, with a general partnership, the profits and losses “pass through” the partnership to the individual partners who simply pay the income tax.
Investment Club Perks
Investment clubs are a great way to start your investing “career”. There are tons of learning opportunities and shared knowledge concerning the markets and various investment strategies.
Plus, they’re less expensive than mutual funds since there are no managerial fees. Everyone has equal say on how the funds are managed.
Other Points on a Successful Club:
- Investment clubs cannot invest more than 25 million dollars without registering with the SEC. There is no minimum.
- It’s important to have an investment club constitution with a mission, vision, goals, regulations, etc. – very similar to a normal business.
- There should also be written rules regarding how assets and transactions will be managed.
- Usually there’s a monthly subscription to keep the investment pool growing as time goes by.
Types of Investment Clubs
There are many different types of investment clubs. These are usually divided into:
- Investment club style: Depending on the type of asset that will be invested (stocks, bonds, real estate, ETFs), an investment can be asset specific.
- Strategy being used: Many investment clubs will exclusively use a specific strategy such as growth investing or option trading.
- Specific members’ demographic factors: The members are either high school students, women, etc.
- Regional investment clubs: Members of a specific area or community gather around to form an investment club.
Legal Structure of an Investment Club
Again, usually, investment clubs are formed as partnerships. Nevertheless, other legal structures such as LLC, LLP, sole proprietorship, and even corporations can be established as well. Corporations are not encouraged given the fact that the tax is charged both at the level of the corporation and at the level of personal dividends (i.e. double taxed).
General Tips for Investment Clubs
The experts recommend that investment clubs abide by the following guidelines:
- Reinvesting of both dividends and capital gains which is equivalent to investing for the long term.
- Buying stock from companies that are expected to grow at fast rates
- Not putting all eggs in one basket. Making diversified investments.
If you’d like more information on how to run a profitable investment club, check out BetterInvesting.org.