Thinking about starting an investment club? Well, it’s definitely an excellent way to pool resources, allowing members to buy more equities and pass along knowledge about investing while educating each other. If part of your wealth creation strategy includes forming an investment club, here are a few dos and don’ts for you to consider before getting started.
- Draft a written agreement or contract with your members. Most clubs operate under a general partnership agreement, establishing the club’s purpose, objectives and structure. A sample partnership agreement can be found in the members section of the Better Investing website. You should also clearly distinguish member roles such as president, treasurer, secretary, etc.
- Develop a strategy. Aside from the written partnership agreement, members must come to an accord about an investing strategy and how much time will be dedicated to meetings. When starting out, groups may need to commit to meeting two to four hours a week and eventually shorten that time, according to the National Association of Investment Clubs (NAIC). The organization also recommends developing a good mixture of growth stocks and mutual funds. Portfolios should be diversified in terms of small, medium and large companies, as well as market segment.
- Register with the NAIC. For guidance, follow their principals as listed above. Registering with the NAIC will allow you access to the organization’s operating procedures, which describe everyday rules and regulations, such as the duties of officers and time of meetings. The NAIC recommends customizing the operating procedures to meet the needs of your members and revising them as necessary.
- Have the necessary resources to continue to educate yourself and the members about running a club and investing tips. You can use NAIC’s Getting Started curriculum or attend seminars, workshops and events sponsored by your local BetterInvesting Chapter — part of a nationwide network. Also, check out Starting and Running an Investment Club for more information.
- Forget to make sure your club or adviser registers with the Security and Exchange Commission (SEC) if necessary. If the adviser is compensated for providing advice regarding the club’s investments, he or she may need to register, according to the.
- Start your club without understanding state and federal rules. You’re playing with fire when it comes to going head to head with the SEC and IRS. As a business entity, your club must submit IRS Form SS-4 to apply for an Employer Identification Number (EIN). You’ll also file a “Certificate of Conducting Business as Partnersâ€ form, which varies by county or state. Your club will file an annual tax return (IRS Form 1065) and may be required to file a state return as well, depending on the state. In addition, members will include their share on their own tax return using the information from IRS Form 1065 Schedule K-1.
- Think short term. A long-term buy and hold philosophy — planning to own every stock for five years or more — has proven to be the best approach for the majority of clubs whose goal is to build wealth, according to the NAIC. Invest regularly. This means that you’re dollar-cost-averaging. You’ll end up owning more shares over the long run. Don’t try to time the market.