How To Start An Investment Club

One thing I've always wanted to do was to start an investment club.  I've been looking at getting a group of people together to start one, and so I've been looking for a good “how to start an investment club” tutorial.  The trouble is, the only one I've found is a book – Starting and Running a Profitable Investment Club.  While this book is great (with over 200 pages of excellent step by step examples), for a lot of investors who already have a good understanding of the stock market, it's not needed.

So, I wanted to put together this resource in case you wanted to start you own investment club.  Here is a step by step guide on how to start an investment club.

1. Find and Organize Potential Members

The first thing you need to do is find and organize potential members.  This is the hardest step, because the premise of an investment club is that you have to contribute money, and time, to the pot that is shared by a group of people.

The biggest thing that you want to find are people who are going to be willing to contribute to the success of the club, and not freeloaders.  From everything I've read, the ideal size of a group is 5-20 people.

Remember, if you have too few members, in order to get enough capital you're all going to have to contribute more money.  If you have too many members, it may be very hard to manage and have an effective meeting.  Or, even worse, you don't agree and have a very fragmented portfolio.

Some clubs even have an initiation fee that is much higher than the monthly contribution, say $1,000 to start, then $50 per month.  The reason is to only get members that are dedicated to helping, and by having a high entry fee, you weed out potential loafers.

Once you've identified potential members, ask yourself the following:

• Do you trust them with your money?
• Do you trust them to pay on time?
• Will they do their own research?
• Will they contribute to conversations?
• Is unorganized and doesn't keep records?
• Has trouble pulling the trigger – either to buy or sell?

While none of those individual may be a deal-breaker, you should ask yourself and confirm.

2. Setup an Organizational Structure

Once you've found some potential members, you need to setup an organizational structure for your investment club.  The smaller the club, the more informal the structure can be.  However, no matter how many or how few members you have, when it comes to dealing with money, having a pre-defined structure is always best.

For the basics, you should agree on the following:

• Club Directors: President, Vice-President, Treasurer, Assistant Treasurer, and Secretary.  Once again, since you're dealing with money, it's always good to have two people looking after it.  Along with the positions, decide how they are elected and how long they stay in the position.  Many clubs do a one year term, but some do longer.  Also, decide on what each person does.  Who actually places the physical trade?  Who runs the educational aspect?  Who does the taxes?  These are all logistical things that are important to consider early on.
• Time and Place: Decide a time and place to meet.  The smaller the club, the easier it is to meet at a home.  Many clubs meet monthly, some more often, some less often.  For example, one of the most famous investing clubs, the Beardstown Ladies, meet and invest every month.
• Club Rules: You should also setup basic rules for the club.  For example, you should have semi-defined rules for buying and selling, how to handle payouts and distributions, how to payout a member if they quit, how to add a member who wants to join, how to end the club.  Remember, things happen, life changes.  You have to plan for these things early on so that the club can continue smooth sailing when they do happen.
• Record Keeping: Every member will always want to know what their percentage of the equity is, so it is important that you keep accurate records at all times.  Decide on how you will do this and how you will communicate it to club members. The simplest way to do this is to have a Google Spreadsheet with everyone's contributions visible. You can even share this with the group.

3. Setup a Legal Structure

Next, you need to setup a legal structure for your club.  There are two key reasons for this:

1. Ideally, the small investment amounts you contribute will grow into a big pile of money
2. You cannot open a brokerage account as a club without a legal structure

The most common legal structure for an investment club is a partnership.  In that case, you need a partnership agreement and operating agreements.  There are many cheap online options that can do this for you, such as RocketLawyer or Nolo, but you may also want to consider getting professional help to set it up at first.  Spending a little on a lawyer to draft some documents can make things much easier in the future.

You'll also need to register your club to get an EIN (Employer Identification Number) from the IRS.  This is actually the easiest step, and you can quickly do it here: How to Apply for an EIN.

Once you have a defined legal structure, you need to open an account at a brokerage.  Many full-service brokerages offer accounts for investment clubs, but they tend to charge higher fees to trade.  I'm a fan of Scottrade, and they offer accounts and help to investment clubs.  No matter where you open an account, you will need to provide copies of your legal agreements and your EIN.

Depending on the company, they may be willing to help you get started investing, or even come to your club meeting to provide basic information and education.  It never hurts to ask, even at a discount brokerage like Scottrade.

4. Build a Common Agenda

Now that all the legal structures are in place for your club, you need to build a common agenda for each meeting.  This is where the magic happens!

Typically, at each meeting, you want to review your financials and performance.  Larger clubs sometimes do this only with the directors, and then email out statements to members.  Typically, they also review investment positions, so that poor performing investments can be identified and dealt with.

Once you've covered the legal stuff, every club does things differently, but you have a few common purposes:

• Discuss/Decide how to invest
• Education and/or Presentations
• Research and Discussions

Many clubs will have “homework” or delegate out research for their members to complete.  Typically, the club will identify a target sector or type of investment, then delegate out companies to research.  At the next meeting, the club will regroup and discuss their findings.

Once the presentations and research has been done, the club has to decide how to invest.  Hopefully the rules you set early on aid in this process (i.e. 2/3 vote or something similar).

Finally, don't forget the education piece.  While you don't have to do it every meeting, it is a great idea to have presenters educate members on various topics.  Many clubs even invite in speakers to share stories and information with the club.  This is a great way to mix it up (so it doesn't get boring), while still being helpful and educational.

5. Have Some Fun

Finally, you have to have some fun!  If you don't, members could get bored easily.  It starts with selecting a fun name, and maybe even fun director titles.

You should also think about food or snacks for your meetings.  If you meet at someone's house, do they cook each time?  What about meeting at a restaurant each week?  Whatever you choose, make sure that you feed your members!

Finally, you could even use some of your profits to go on fun outings.  I've heard of some groups committing to vacations with their investment earnings – trips to Hawaii or other fun destinations.  While not common, it certainly mixes things up and makes it fun.

What are your thoughts on how to start an investment club?  Is it something you've considered?