Money Matters with Nimi

When an investment club is properly set up and run, it can provide a supportive atmosphere that makes investing most rewarding. An investment club usually consists of a small group of individuals who pool their money to make joint investments. This can provide those who have limited funds with a vehicle through which they can have access to investments that may otherwise be beyond their capacity. Not only can pooling money create better investing opportunities, but members also save on transaction costs by sharing the costs and fees associated with buying and selling stocks as a group. There are several steps involved in setting up and running an investment club. Here are some issues to consider.

How many members? It is common to have between 5 and 20 members, often groups of friends, neighbors, colleagues, church members, or relatives, who have diverse interests and experiences. If the group is too small, you may not accumulate enough money to make significant investments. Yet, if there are too many people, it can become unwieldy and awkward to have regular meetings or to reach a consensus regarding investment options. A number of between 6 – 15 people keeps group discussions manageable. A balance between some novice investors along with some experienced investors will ensure that you have the right mix of people.

Put structures in place It is important to recognize that an investment club isn’t just a group of friends who come together to invest. Money matters can be sensitive and if not handled right can damage relationships. Club matters should thus be formalised and a solid structure should be put in place to guide a club’s activity and ensure that its agenda is carried out efficiently and without friction. A limited liability company or a legal partnership tends to be the most common structure, a formal organization with members who have rights and duties. Once it is legally established, it is important to have a formal agreement in place broadly stating responsibilities of group members. It should also include information and provide a record of on important issues such as the club’s investment philosophy, of when, where, and how often the group will meet, initial membership contributions and ongoing dues. It will also state how the club will manage new membership, how members can liquidate their investments, how dividends will be distributed divesting from and the dissolution of the investment club. This vital bit of paperwork is absolutely essential to protect members should things not work out. All members must be in agreement of the clubs legal and operational framework and understand the risks before committing.

A common investment philosophy A common investment philosophy and an adherence to its processes are essential ingredients for an investment clubs’ success. Ideally, a clearly defined investment style should include some restrictions or at least quantifiable rules or limitations on the club’s investment portfolio to ensure a minimum level of diversification always exists. Individual risk profiles and financial situations vary; members who are more aggressive short-term investors or speculators may not partner well with the more conservative members who would rather wait to benefit from long-term capital appreciation. Members should have similar or at least compatible investment styles and objectives and should be prepared to support its approach.

Hold regular meetings A preliminary meeting will help everyone to determine if they can indeed work together and will help to articulate the commitment expected from participants. Members should agree on a name and set guidelines as to how the club will be organised and run with all the attendant responsibilities. Investment clubs typically meet monthly to discuss investment options, and to make investment decisions. It is important to review club financials, individual investment progress and any cash balance available for investment. Meetings should hold in an appropriate venue with few distractions and should follow the formal meeting process; it is important that meetings are run efficiently so that they don’t become tiresome making members struggle to attend.

Financial commitment After a member contributes an initial lump sum for investment purposes, the typical investment club requires a monthly contribution from members. Some clubs are flexible and do not impose a set amount that members must contribute. Members should be comfortable with the level of financial commitment required so that no one is hard pressed to come up with the monthly minimum contribution. Small investments may frustrate investors who want to commit larger amounts of cash in the hope of seeing a larger return. Some members may fall short on occasion as unexpected expenses come up, and a large monthly contribution may eliminate members over the long run. Ideally, your investment club contributions shouldn’t be the only investment you are making. You should also be contributing to your Retirement Savings Account (“RSA”) and building other personal savings and investments.

Who does what? Officers should be elected early on as it is important to be clear as to who does what. Typically, a Chairperson presides over meetings and a deputy in their absence. The Club Secretary keeps a record of minutes, and sends out reminders of upcoming meetings whilst the Treasurer coordinates financial matters relating to subscriptions, and keeps records of the club’s holdings as well as each individual member’s holding. The ability of this member is critical to the success of the club so this role must be selected carefully. To enhance the experience of individual members and make them feel more involved, some investment clubs limit the amount of time each member can hold a particular role. This will also diminish the chance of certain members becoming too controlling.

A good learning opportunity While the primary motivation is to make money, investment clubs are also a great way for investors to share ideas and learn about the market; indeed one of the greatest benefits of an investment club is the learning opportunity it provides. Money matters can be complicated and learning about the different types of securities, investing styles and strategies can be hard to do alone.  Through an investment club, one can benefit from the support and encouragement of “like minded” people, who have a similar interest in investing. An investment club encourages the sharing of knowledge and experience between members. As the group becomes more knowledgeable, the quality and challenge of investing becomes more exciting. Through presentations, seminars, guest speakers, and assigned readings on related topics, members will be educated on the options available and learn the basic concepts of investing. The media also provides a plethora of investment ideas and information.

Have a long-term view If your time horizon is only a year or less an investment club might not be appropriate for you as you need only invest in short term instruments. Investing is a long-term pursuit. It is impossible to time the market accurately and to pick winning investments all the time. A short-term horizon makes it difficult to manage the club’s money effectively. When an investment club is properly set up and managed, not only can it provide members with decent returns, but it can provide them with an invaluable educational experience as well as a supportive friendly atmosphere that makes investing all the more rewarding.

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