Invest en masse
15 Jan 2014
Probus club members around Australia participate in a number of interest groups. But one of the most stimulating and challenging are investment groups.
The Australian share market has had a bumper year, rising around 16 per cent. That’s expected to renew interest in finance investment clubs around Australia. “The share market is now improving,” says Susan Jackson, Founder and Executive Director of the Women’s Financial Network, and author of The Investment Club Start Up Guide. “We expect to see some real momentum with investment clubs.”
Set up
There are a number of steps to create a successful investment club, including agreeing to common objectives and the right legal structure, but above all it’s about choosing the right members who are committed and responsible. “That [the right members] is the most important thing,” Jackson says.
An investment club is formed when members group together, pool their money and then make collective investment decisions. In addition to ‘start-up’ funds from initial contributions, members usually make ongoing contributions.
They meet frequently, usually around every month, and they have a typical club structure, including a chairman, treasurer and administrator/secretary.
Why invest together?
Jackson says there are a number of benefits to investment clubs. It’s an opportunity to join with others to learn investing, something that is often seen as daunting and boring.
The clubs can make investing fun.
Jackson says there is also a perceived safety of investing with other people. Interestingly, Jackson says that anecdotal evidence suggests groups formed to socialise and learn outperform clubs formed just for profit making.
The other benefit is the chance to turn a profit. “A lot of them do make quite good money,” Jackson says.
Tony Hunter, Head of Education at the ASX, says that investment clubs have historically been more popular with women. “Women are prepared to share ideas,” he says. “If blokes have ideas they can be more inclined to keep them to themselves.”
Choose the right people
Perhaps the key to forming and running a successful club is member selection.
“Make sure you select people who understand what it’s about,” Jackson says. “I suggest people take more time to get the right sort of member, rather than just get people together really quickly and find out you’ve got a bit of a mess later.”
Selecting members includes electing key positions, such as a chairperson, secretary and treasurer/financial controller.
Intent and purpose
The next important step is to agree on objectives. That will include how often you’ll meet, how much you’re going to contribute and what your investment objectives are.
Hunter says an investment club is just like any other investment, such as superannuation: you need an objective.
Club members will have to work out what their investments will be confined to. Will they invest only in top 50 or top 100 stocks? Will they invest in more risky assets, such as speculative stocks or leveraged instruments like warrants?
“You really need to narrow it down,” Hunter says. For example, the club might only invest in stocks that have made a profit or paid a regular dividend. “That’s not a bad benchmark and it will exclude a lot of companies,” he says.
Jackson explains that most investment clubs operate as partnerships with a registered business name. Each member then has an equal share. So each person in a 12-member club would own one-twelfth of the pooled assets.
Some larger clubs might consider a company or trust structure.
A partnership arrangement sets out the rules. It deals with issues including how shares will be valued if someone leaves, how much is contributed, and how long members are committed to the group.
“You need to get the structure right before you set up a bank account or share trading account,” Jackson says.
Creating partnerships
Jackson says it is not hard to form a partnership. There are a number of websites on the internet that sell kits with two to three sample partnership arrangements. Clubs can cut and paste these for their own use. “It’s fairly straightforward,” she says, adding there is no right and wrong way, and the rules and structure depend on what you feel suits the club.
Jackson does note that an investment club partnership is not a taxable entity, so any distributions need to be included as income on members’ personal tax returns.
Clubs then need to set up bank and share trading accounts, and appoint someone for record keeping, including purchases, sales and dividends received. An Excel spreadsheet can be used for record keeping, though Jackson says there are lots of free software programs available on the internet that can be used to track a portfolio. The club also needs to appoint someone who is authorised to place share orders.
Hunter says some full-service brokers may be prepared to meet with clubs to discuss their structure and investment objectives if they have enough capital.
No matter what investing strategy you adopt, there will be losses. “No matter how good you are, as a share investor you’re going to have wins and losses,” Jackson says.
At the end of the day, Jackson says a successful investment club is about the people. “It comes back to members,” she says. “The key things are really about making sure you get like-minded or right-minded members in the club. You should have a bit of fun with it.”
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