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An investment club is typically formed by a group of individuals who want to learn how to invest in the stock market by pooling together a small amount of money each month. Not all investment clubs invest in the stock market; some decide to invest in property, trade FX currencies, or art work for example.
Investment clubs provide a supportive environment where investors can learn how to invest by sharing knowledge and experience, with the benefit of being in a social club with like minded people. Club members typically bring together a diverse collection of people and members take on various roles and responsibilities depending on their strengths and weakness.
Typical roles within an investment club include:
- Chair - co-ordinates the other club members and ensures that each club member fulfills their commitments to the club
- Treasurer - manages monthly member subscriptions, withdrawals, unit valuation, income/expenditure book keeping and investment club tax returns, such as Form 185(new) in the UK. It is not uncommon for the treasurer to also act as the club trader
- Secretary - keeps a record of club minutes and general club administration
- Research / Analyst - researches and analyses investment opportunities
- Trader - ensures that the investment transactions that the investment club agree to are executed as planned
The Investment club members tend to meet regularly, typically on a monthly basis, to make investment decision, discuss lessons learnt and review past performance. They are typically organised as a legal partnership, however some investment club choose be self-directed, whereby the club members meet each month to discuss investment decisions and thereafter club members invest through their own brokerage accounts, rather than investing collectively. Typically investment clubs have a bank account in the name of their investment club, which requires multiple signatures, where all members pay monthly subscription into, typically via a standing order.
Investment clubs have been in existence since the early 1900s, with one of the earliest examples of a modern investment club being the 'Mutual Investment Club of Detroit', which was founded in 1941. The Detroit investment club was established when a group of individuals wanted to invest in stocks, however they did not have the money to do so individually, as trading costs were prohibitively expensive. As a result the group decided to form an investment club so that they could pool together their money to improve their buying power and benefit from economies of scale through lower trading costs per person. The Detroit investment club still lives on and it is said that their investment portfolio is now worth many millions of dollars.
One of the earliest examples of a group of people who clubbed together to make investments was an art fund called, La Peau de l’Ours (The Skin of the Bear), that was set up in 1904 by a Parisian art lover called Andre Level. Level persuaded a dozen other art lovers to contribute 250 francs each year to buy modern paintings. In return the investors got to hang the purchased artwork in their homes, for a ten year period, before the fund was cashed in by selling off the collection. Over the 10 years, Level collected work from artists such as Picasso, Matisse and Braque.
In 1914 when the First World War was about to break out, the collection was sold. One fifth of the sale was donated to the original artists, and the remainder was divided between the investors, generating them a 4 fold return on their investment. You can only try to imagine what that investment fund would be worth today if they had went for a buy and hold strategy!
- Reduced Risk: Each club member pools together a relatively small amount of money each month, while benefiting from collective buying power
- Buying Power: Trading costs are typically fixed therefore investment clubs benefit from economies of scale through members pooling their money, which results in improved returns through proportionately lower trading costs
- Education: For first time investors the market can be scary! Learn and grow together through education and the application of knowledge in a supportive environment
- Collective decisions: Surveys show that collective investment decisions based on discussion and democratic choice are more likely to produce sustained profits (source NAIC). Club members come from all walks of life giving access to an immense pool of knowledge
- Social: It is fun and is an excellent way of meeting new people with a similar mind set, while widening your social circle.
The main reason that unites all investment club members, is the desire to increase their wealth through investing in companies that will provide capital appreciation and potentially a source of income. Capital appreciation is achieved through increased share prices and income can be generated through dividend payments or investment strategies such as writing covered calls.
Despite significant stock market crashes over the centuries the stock markets have consistently out performed inflation. Consider the Dow Jones index of 30 fundamentally sound blue chip companies that are listed on US markets. Based on statistics from the US Bureau of Labor Statistics 'Inflation Calculator', if you had simply invested money in an inflation linked investment account between 1932 and 2007, you would would have made a return of approximately 1,472%. Sounds great, however in reality all that you would have achieved is consistent buying power e.g. products, such as for food stuffs, that cost $1 in 1932 would cost $14.72 in 2007 if the price of those products increased in line with inflation for that period.
If however you had invested in the companies, such as those listed in the Dow Jones index, you could have achieved returns of approximately 29,500% based on the increase in Value of the Dow Jones (30) Industrial Average for the same period between 1932 and 2007 i.e. for every dollar you invested in 1932, would now have now generated a return of approximately $295, as illustrated in the following Dow Jones (30) Industrial Average performance chart:
Legal Structure Investment clubs are typically set up as a Partnership with a lesser number of clubs choosing to Incorporate themselves or become self directed. The Investment Club Associations listed below typically provide a standard partnership agreements for investment clubs based on regional legislation.
Bank & Brokerage Accounts It is common for Investment Clubs to open a bank account to receive monthly subscriptions from their club members. The bank account typically requires multiple signatures for money to be withdrawn. Periodically the money in the bank account is transferred to a brokerage account to facilitate investments. Unfortunately not all brokers provide support for Investment Clubs that are formed as a partnership, however a list of some of those known to provide Investment Club accounts is shown below. There are a greater number of brokers that accept Investment Clubs that are incorporated, however incorporated investment club accounts typically encore Professional Brokerage and Market Exchange fees, which are significantly higher than non-professional 'partnership' trading fees.
Goals & Education When a club is formed it is considered good practice to establish financial goals, an investment strategy and decide on a method of developing an improved understanding of the stock market and investment products that are available.
Meeting Agenda Investment clubs typically hold monthly meetings that last between one and two hours. The following agenda, which is based on the TICN general meeting agenda, can be used to provide a structure for the investment club meetings:
- Register attendance and call the meeting to order
- This establishes that a quorum is present to conduct a business meeting.
- Approve previous month's minutes
- This allows everyone to approve that the last meeting was documented correctly. This isn't the time to debate whether a decision was appropriate; the minutes just report what happened.
- Treasurer's report
- Provide a report on investment transaction since the last meeting, stating the price and total amount.
- State the portfolio value as of the valuation date, as well as available money in the bank and brokerage account.
- Provide an update on member subscriptions and unit valuation
- Distribute the monthly member valuation reports
- State the club position with regards to its investment targets
- Old business
- This is the opportunity to discuss and resolve unfinished items.
- Economic report & Group reports
- On a monthly rotational basis, someone should be assigned to present a brief economic report covering any major economic news, including the short-term economic outlook.
- Club members who carried out company research should provide a report on companies that meet the clubs investment criterion
- Portfolio update
- Review of the stocks presently held by the club should take place, refreshing the club on the ranges (Buy, Hold, Sell) that were calculated for the stock, as well as the current price, current P/E ratio, and any other recent company news.
- Discussion of buy/hold/sell decisions
- New companies are presented and the current holdings are reviewed. The club should discuss any portfolio changes that the club is going to make.
- It makes sense to discuss the stocks that will be sold first, so that the club knows the amount available for purchasing stocks.
- A public or secret ballot vote should be taken on any changes to the investment portfolio.
- All members must be dedicated to the club's long-term success, therefore need to address their personal growth in investment training.
- Next month meeting
- Confirm date, time, and place.
The majority of investment clubs, at least in the United States and the United Kingdom, implement a Unit Valuation System (UVS) to apportion ownership between Investment Club members. It enables club members to make flexible monthly subscriptions (contributions) and withdrawals through the process of purchasing and cancelling units. As a performance metric the Unit Valuation System strength lies in the ability to apportion ownership at any point in time, as club members buy and sell units through making subscriptions and withdrawals.
An alternative method of managing club ownership is a system based on Equal Ownership. The primary benefit of using an Equal Ownership system, whereby each club member contributes an equal amount on a fixed date each month, is simplicity. The challenges with an Equal Share Ownership scheme, are what happens if a club member:
- cannot make a monthly payment
- makes a late payment
- needs to withdraw money
- wishes to increase or decrease their monthly contribution
- is new and cannot afford to pay the historical monthly subscriptions that have been paid by legacy club members
The primary benefit of using a Unit Valuation System is flexibility to make varying subscriptions at any point in time. The UVS approach addresses the short comings of the Equal Ownership system, however a potential consideration when adopting a UVS approach is voting rights, as members with a larger holdings may require additional voting rights on investment decisions. Some clubs choose to base investing voting rights on unit ownership, however for none investment decisions each club member has an equal vote.
Using timetotrade treasurers can manage either Equal Ownership or Unit Valuation Systems, and then generate the necessary reports for investment club meetings.
There are two possible ways in which the treasurer of a UK investment club can return details of any gains and income made by the club in a particular year:
- in accordance with strict statutory requirements
After an investment club has been formed in the UK, you must inform your local HMRC tax office. The HMRC should invite all clubs to adopt the standard form of agreement when they become known to their local tax office and the HMRC should provide any assistance necessary in explaining the terms of the agreement. However, the HMRC cannot compel clubs to adopt the agreement and clubs can decide not to do so. If an club decides not to adopt the Standard Form of Agreement, it should be pointed out to the club's officers that:
- each member will have to show on his or her annual tax return their share of any gains arising on the disposal of the club's investments, and of any income derived from the investments
- the person(s) in whose name(s) the club's investments are held may be required to make a return under TMA70/S24
- the treasurer or other officer who handles the club's money may be required to make a return under TMA70/S13
Various software is available to help club Treasurers with managing member subscriptions, keeping track of the unit valuation and generating tax returns.
timetotrade is the UK's leading online Investment Club accounting system. You can find out more on this link: Investment Club Software
- The World Federation of Investors (Global)
- TICN - The Investment Club Network (Global)
- Australian Shareholders' Association (Australia)
- Interessenverband für Anleger (Austria)
- Verband österreichischer Investmentklubs (Austria)
- Investa (Belgium)
- Vlaamse Federatie van Beleggingsklubs en Belegers (Belgium)
- Instituto Nacional de Investidores (Brazil)
- Canadian Shareowners Association (Canada)
- Czech Association of Investment Clubs (Czech Republic)
- Finnish Shareholders Association (Finnish)
- Fédération Francaise des Clubs d'Investissement (French)
- Deutsche Schutzvereinigung für Wertpapierbesitz E.V. (German)
- Hong Kong Institute of Invetors (Hong Kong)
- ライフタイム - The Japan Association of Investor Education (Japan)
- Nederlandse Centrale Vereniging van Beleggingsstudieclubs (Netherlands)
- Aksjonaerforeningen - The Norwegian Shareholders Association (Norwegian)
- Storwarzyszenie Inwestorow Indywidualnych (Poland)
- Associação de Investidores e Analistas Técnicos do Mercado de Capitais (Portuguese)
- South African Institute of Financial Markets (South Africa)
- Sveriges Aktiesparares Riksförbund - The Swedish Shareholders Association (Swedish)
- Proshare Investment Clubs (United Kingdom)
- Better Investing NAIC - National Association of Investors Corporation (United States of America)
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