Are you looking to put some excitement back into your portfolio? Or, like many of us, are you frustrated with the limited number of choices you have as you prepare for retirement?
About 90,000 of your fellow investors have figured out that instead of slogging through the financial world alone, joining an investment club can be an engaging and entertaining way to build your nest egg.
The burgeoning ranks of Americans with self-directed retirement plans are fueling the trend toward investment clubs. As the traditional corporate pension goes the way of the dodo bird, companies are shifting the burden of retirement planning onto the shoulders of employees. And employees are looking for alternatives to the static, and often outdated, options available through employee-sponsored plans.
Investment clubs are a forum for companionship and the sharing of great investing ideas. Whether you're a novice or a seasoned investor, investment clubs are a great way to make friends, hone your money-making skills and generate profits. If you're interested, read on to learn how you can make the most of this increasingly popular -- and profitable -- pursuit.
What Are Investment Clubs?
Investment clubs are simply groups of like-minded people who meet regularly to share investing ideas. But the most compelling feature of an investment club is that once the members decide on the most profitable idea, the group as a whole makes an investment in it.
Clubs typically are organized among family members, friends, coworkers or other groups of people who have roughly the same investment goals. Members get together (usually at a member’s house or in a restaurant) to debate the investment ideas they bring to each meeting. Then they vote on what to buy or sell.
Club investments tend to range from as little as a few hundred dollars to several hundred thousand dollars. A major advantage of the investment club is that by pooling resources, the club as a whole can take a bigger position in securities than one individual alone. This enables clubs to function as small-scale, customized mutual funds.
Members agree to contribute an initial amount to the group's portfolio, plus regular monthly additions. The club’s money is deposited in an account with a broker chosen by members. Since the idea behind an investment club is to conduct independent research and make informed decisions, you’re better off using a discount broker. Unlike full-service brokers, discounters won’t charge you for unnecessary handholding.
Finding the Right Investment Club
Nearly 9,000 investment clubs representing more than 90,000 members belong to the National Association of Investors Corporation (NAIC). The NAIC is a non-profit organization that aims to teach individuals how to become successful long-term investors. You don’t have to join the NAIC to form an investment club, but it is a good source of information for anyone looking to learn more.
According to the NAIC, long-term capital appreciation is the top goal of most club members. Though making money is great, many members also cite a desire to take control of their portfolios and break free from self-serving brokers and indifferent money managers. Another key benefit, of course, is the social interaction and intellectual stimulation that comes from spending time with a group of people working together to achieve a common goal.
If you decide you'd like to join a club, make sure you conduct due diligence first. Check that the club’s portfolio strategy mirrors your own goals. You’d be poorly served by a club that emphasizes rapid capital appreciation when you’re an income investor who’s primarily interested in healthy dividends.
When you find a club that interests you, attend a meeting as an observer. Scrutinize the club’s track record, partnership agreement, mission statement, and administrative fees. Typically, clubs operate most efficiently when they have less than 20 members.
Starting Your Own Investment Club
If you've looked around and can't find an established group that meets your needs, think about setting up your own investment club.
Most clubs are organized as general partnerships because it’s cheap, easy, and doesn't require a lawyer (though you still may want to contact one with any questions). The partnership needs to get an employer identification number (EIN) from the IRS to open brokerage and bank accounts. Make sure you conduct all trading activities under this EIN.
You don't need a lot of overhead -- most investment clubs meet at members' homes or in coffee shops or restaurants. Out-of-pocket expenses related to club activities can be deducted by the partnership. For example, if your club meets at a restaurant every month to discuss business over dinner, you can deduct the dinner as a legitimate expense.
If your investment club is organized as a general partnership, gains, losses, deductions, and credits will pass-through to the partners. Income will be taxed only once, at the individual members' level.
Your club needs to file Form 1065, US Partnership Return of Income, by April 15th each year. This form lists the club's income and expenses. The club also must send to each member a Schedule K-1, Partner's Share of Income, Credits, Deductions, etc.
If you're ready to start your own club, get a free starter kit by contacting the NAIC at 877-275-6242 or visit www.betterinvesting.org.
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