In It To Win It For The Long Haul

Here are some final words on managing your investment club

Congratulations! If you have been faithfully following our series, then your club should be officially up and running. And you should have all the tools needed to build a prosperous portfolio.

Granted, some dubs get off to a shaky start during the first year of operation; there are bound to be disputes over investment picks and member participation. “Many dubs show losses or only small gains during the first year or two,” says Thomas E. O’Hara, chairman of the National Association of Investors Corp. (NAIC) in Madison Heights, Michigan. “But as members become more knowledgeable and the amount of money under management grows, gains often begin to increase exponentially.”

NAIC recommends that a club’s investment objective should be to double its money every five years. To do that, the club’s investment portfolio would have to achieve an average 14.9% compounded annual rate of return.

In 1995, the average dub (which was about nine years old) had earned 12.3% over its lifetime. Which isn’t half bad given that if you invested $300 a month at a 10% rate of return, you would accumulate $61,965.61 in 10 years. However, O’Hara says past surveys conducted by NAIC have shown the average club exceeding the 14% aim on many occasions.

Those clubs that survive the two-year start-up phase tend to do very well. adds O’Hara. In time. your club will discover what some 24,000 clubs have known for years: good research and regular deposits are all it takes to invest like the pros. Over the past decade, roughly twothirds of all investment clubs have matched or beaten the Standard & Poor’s 500 stock index, according to NAIC stats.
“The biggest reason that many new investment dubs fold within two years is because many members fall prey to a get-rich-quick mentality and they cash out early on, which creates animosity between members,” explains Robert Lancaster, president of the seven-year-old New Freedom Investment Club in Durham, North Carolina. “This is why it is important that you form your dub with like-minded individuals who have the same investment horizon,” he adds.

New Freedom’s 20-member club comprises mostly professionals, and some entrepreneurs, ranging in age from 25-45. The dub’s portfolio of smalland mid-cap stocks–valued at $76,000–earned a 31% rate of return last year.

O’Hara agrees with Lancaster’s assessment that short-term trading doesn’t work with a long-term undertaking. “As long as members keep in mind that running an investment dub is a lifelong project, it is possible to keep your dub going for 20 or 30 years,” he says. “The key is to just stay focused.”

Lancaster says another important point is understanding the bylaws. “We update ours annually,” he points out. “Each year, you learn something new about the nature of the club and things you have to deal with from a policy standpoint.”

As you may recall from Part 2 of this series (November 1996), your formal operating procedures and bylaws should have provisions for when the club ceases to exist and how payments are to be made to members. Ideally, members should stay together

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