Investment Clubs – Pitfalls and Common Questions
Investment clubs can offer many benefits. But try to avoid a few of these pitfalls:
How well do you really know everyone in the club? Make sure nobody runs off with the club chequebook and cashes in your joint funds! Don’t neglect the legal formalities of setting up the club. A good precaution is to ensure that two people have to sign up to any financial transactions. This is important even if your club consists of family members.
Unless you delegate work around the club you will find that a dedicated few end up doing everything. Some may be coming along for the free ride. Others might lose interest because they are not feeling involved.
Keep up interest
Members may lose interest in club activities. It can be due to a club sticking to the same routine for several years without injecting anything new. Take the pulse of your members (figuratively). Are they still excited to be in the club? Do you all need a field trip or guest speaker to liven things up?
Factor in time
Investment clubs take time. Make sure that you and your fellow members have the time to devote to it and are willing to devote that time. If you figure about one to three hours for a monthly meeting and two to four hours of research or work preparing for the meeting, that comes to three to seven hours that you’ll have to commit each month.
Make sure your sums add up
This may seem obvious and silly, but make sure that you’re performing your maths correctly. ProShare produces useful instructions and software for keeping track of your contributions and gains.
To conclude this guide, we’ll look at some frequently asked questions (FAQs):
Q. How much money does my club need before buying its first share?
A. With some execution only brokers, you could make your first purchase with as little as £200 without getting hit for extra commission. With others, it may mean waiting until you have £1,000.
Q. What happens if someone wants to leave the club?
A. This should be provided for under the club’s constitution. The remaining members have the option of buying out the leaving member’s portion of the club’s assets or liquidating a percentage of the club’s holdings.
Q. Is it really necessary to set up contracts?
A. Yes, just like in a business partnership, contracts should be prepared in case the worst comes to pass. We highly recommend ProShare’s Investment Club Manual for all the mechanics of setting up and running an investment club. The legal documents are included in the manual and may only require a few minor changes to suit your club’s circumstances.
Q. What about taxes?
A. At the end of the tax year, the treasurer will give each member an Inland Revenue form stating the individual’s portion of the capital gains/losses and dividends for the year. Each member has a responsibility to provide this to the Inland Revenue with his tax returns. Unless a member is subject to a higher tax rate, he is unlikely to have to pay tax on dividends. In addition, he will not be liable for tax on capital gains unless he exceeds the annual tax-free allowance.
Q. And bank accounts?
A. Most high street banks and many building societies offer a “Treasurer’s Account” specifically for clubs. The general guideline is that there will be no charges as long as the number of withdrawals in a month is kept to a minimum. A nominal interest rate is usually given on credit balances. Dues from members should be set up as a standing order into this account. To make share purchases, a cheque is sent to the broker and deposited in the brokerage account.
Q. Can an investment club use a Individual Savings Account (ISA)?
A. No, ISAs are available for individual investors only.
Q. Is there a lot of accounting paperwork involved?
A. Although there is some paperwork each month, it shouldn’t take the Treasurer more than about an hour to prepare the accounts. The ProShare manual shows how to run the Unit Valuation System to track the performance of the club and provides sample accounts that can easily be set up on a computer spreadsheet. This valuation method is used by most investment funds.
Q. Can I discuss investment club issues with my fellow Fools?
A. Yes you can. Try our Investment Club discussion board.
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