Investing with friends, family or colleagues? This guide explores the most important steps of starting an investment club.
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If you are considering starting an investment club, congratulations! You are ready to take the first step to expand your financial literacy and build your wealth.
There are, however, a few things you should know before jumping in. An investment club is not a short-term, get-rich-quick solution. Trying to make money over a shorter period of time is a bad approach, not only when it comes to investment clubs, but for individual investors too.
A three- to five-year vision is a common outlook when it comes to investment club strategies. As such, potential members should be vetted based on their long-term commitment. If members of your investment club decide to leave and pull their money out after a short period of time, it could cause serious damage to your investments.
This guide will provide some insight into what an investment club is and, most importantly, the steps involved in starting one. While this list touches on most major points, it is not set in stone and you might need to take some additional steps.
Establish An Objective
Just as individual investors have different investment styles, so do investment clubs. One major factor that will determine the success of an investment club, regardless of its size, are the investment goals, philosophy and strategy.
It can be very damaging to an investment club when some members want to invest in high-risk penny stocks while others gravitate towards blue chips. Determining what you’d like to achieve and setting out guidelines on how to get there are the first steps in starting an investment club.
When deciding on an objective or purpose for your investment club, keep in mind that while making profit would certainly be one of the main goals, we highly recommend focusing on education and enriching the members’ financial literacy.
If you are too concerned about making money, especially when you are a beginner investor, your share selection is likely to suffer. Investment clubs that put effort into enriching their members’ financial literacy usually find that profits follow.
Also remember that your investment club’s objective, and therefore strategy, may change over time as members age, financial status or commitments evolve or people retire from the club and new blood joins the rank.
Formulate A Strategy
Now that you’ve decided on your investment goals, it’s time to button down a clearly defined investment strategy, ideally with some quantifiable rules or limitations on the club's investment portfolio.
Will you have a ‘trading portfolio’, an ‘investment portfolio’ or a combination of both? An investment club might have special rules or specifications on the portfolio to ensure a certain level of diversification always exists.
Having a pre-defined investment philosophy will ensure that all members are in agreement, not only about matters like share selection, but also the processes to be followed in executing decisions.
This will prevent someone from acting too hastily based on a ‘hot tip’, for example. It’s good practice to put your club’s investing principles down on paper and vote them in as a team to ensure everyone is on the same page.
This will allow for less confusion and more unified decision-making.
When formulating a strategy, it’s always good to focus on long-term results rather than instant gratification. The following points could be useful when laying down the blueprints of your club’s strategy:
● Commit to a set amount regularly (usually monthly), even when market conditions do not look good.
● Reinvest dividends and capital gains – compound interest will make your money grow faster.
● During the first three years it’s advisable to allocate the majority of your funds to a ‘buy and hold’ or ‘investment’ strategy, and allocate less money to trading in a separate trading account.
● Look for companies whose turnover is increasing faster than the industry standard. Growth shares usually offer better potential for higher dividends and continued growth.
● Lower risk by diversifying – invest in different industries and different-sized companies.
Find The Right People
Finding the right members is key to the success of the investment club, as the members’ vision has to be in line with the objectives and investment philosophies you have in mind as founder of the club.
If the members don’t share the same investment philosophy and ideology, the investment club may struggle to make headway simply because there will always be a clash of interest, which can slow down progress.
According to most sources, the ideal size of a group is five to 20 people. Remember, if you have too few members, there will be fewer people to share the responsibilities and you’re going to have to contribute more money.
Moreover, each member may have to contribute more money to achieve the same diversification of a larger club. If you have too many members, on the other hand, it may be difficult to manage the group and have effective meetings.
Your investment goals, mission, policy and ideology will not only guide you in the industry you are going to concentrate on, but the members you are going to have. The most important thing you want to be mindful of is finding people who are committed to contribute to the success of the club, and not freeloaders.
Once you have identified potential members, get them together to pitch your idea of forming an investment club. This should be casual and relaxed, but it’s important to be assertive with your goals and expectations.
Don’t promise anything. It’s very important to ensure the group understands and agrees on the investment principles, why the club is established and what the common goals are. Take a long-term view, stay away from anything you do not understand and never try to time the market.
When meeting new potential members at the introductory meeting it’s important to gauge whether you have enough in common to work together, and if they are committed, disciplined and can be trusted to make payments on time.
Other points to discuss and agree on are market research, keeping organised records and making big decisions when it matters.
Choose A Legal Structure
Since the initial small contributions are likely to grow into a significant pile of wealth in future, you need to agree on a legal structure for your club. Having a legal structure will also allow you to open a brokerage account as a club.
An investment club is usually a legal partnership or a Limited Liability Company (LLC). Under these structures the members are considered joint owners of the entity and their financial contributions can follow standard accounting rules. A general partnership is the simplest structure to use.
Setting up a general partnership is fairly simple and the steps involved include:
● Registering a name
● Getting an EIN number
● Developing and signing a partnership agreement (for this you may want to consider getting professional help)
All of the income generated by a general partnership is distributed yearly to the partners, who each have to pay their portion of tax on their individual tax returns. It is important that accounting records are established as members may not necessarily contribute the same amount, nor be participants for the same durations.
An investment club, therefore, needs to have a clear way of determining each member's share at any given point since members will inevitably want to withdraw funds from their share of the club's assets.
For this reason, the partnership agreement needs clear rules about penalties for early withdrawals and specify a liquidation price, which is usually slightly lower than the value of their contributions.
Open A Brokerage Account
An investment club will usually open a brokerage account in the name of the club, as established by the name of the legal entity, and for this you will need to provide copies of your legal agreements and your EIN.
This is necessary should the founding members accept a mandate of investing directly in equities, rather than equities via a unit trust. Some brokerage firms have certain rules and unique offers and incentives for investment clubs, so be sure to be shop around for the right fit.
The Simpler Way
Being part of an investment club can be highly rewarding. Unfortunately, many people are held back by the fear that they won’t succeed or that they’re not experienced enough. This is where an investment app like Voleo can be empowering.
Voleo is an accessible, collaborative and fun social stock trading app, enabling people to invest together in ways that have never been possible before. Voleo is designed make it easy for anyone to start an investment club, regardless of their level of experience, making it the best investment app in its class.
To start an investment club with Voleo, all you need to do is:
1. Download the app
2. Create your investment club and invite friends
3. Select a few operational parameters (such as simple or super majority, and the amount of time to vote)
4. Invite your friends
Each member inputs their personal information – it is a real brokerage account – and Voleo does the rest, including collecting signatures and filling all the required forms. This means that you can focus on trading without needing to worry about the bureaucratic steps you would otherwise have to take to start an investment club.
If you are looking for an investment app to empower you to expand your financial literacy and achieve your wealth goals sooner, why not give Voleo a try? Voleo is available for both Android and iOS.