When I and 4 friends decided to start an investment club, we were green eyed and like a lot of recent MBA graduates, we wanted to change the world.
Finally, we recognized it wasn’t going to be a walk in the park.
It was going to require commitment and discipline. It was going to be long term
So far, we’ve had our good days and bad moments
But, for me, it has absolutely been worth it.
Here are five key requirements for a successful investment club, based on my experience starting and operating an investment club for 4+ years;
1. Work with people you like
- Start an investment club with people you know really well and can work with over a period of time. Money can be a sensitive issue with friends so you should be objective about who you think is matured enough to handle the highs and lows that come with making investment decisions.
- You may decide to have as many members as possible. However, based on my personal experience, I advise club membership is kept to a minimum of 5-10 people. It is easier to manage and get 5-10 people to agree on a shared objective.
- Our club started with 6 members but we currently have five (5) members. We agreed that membership should not exceed this number for now.
We also decided on the following guidelines;
- If a member of the club decides to stop being a member for any reason, the election of a new person, to take the place of the member, should depend on a ‘no objection’ agreement by other members of the club.
- A new person looking to join the investment club must be proposed or nominated by an active member of the club and seconded by two existing members. Subject to acceptance by all members, the new person will be accepted.
- The club reserves the right to refuse admission to any person without giving a reason.
2. Get aligned on your goals
- This step provides the foundation for all subsequent investment decisions.
- All members of the club should have similar or compatible wealth goals. Every member needs to be on the same page with respect to the goal or objective of the club.
- Differing views or additional perspectives on the goal of the club should be evaluated and discussed comprehensively before the investment club is incorporated.
- Important questions that will guide you in understanding each member’s goals include;
- Is the wealth objective to build long term wealth or earn short term dividends?
- Is the wealth objective to invest In a specific asset category or multiple asset categories?
- Do the prospective members of the club want to build wealth in specific industry or in multiple industries?
- What’s the time horizon for the investment club?
- Is there a defined tenor for the existence of the club? i.e. Will the investment club exist for 2 years, 5 years or until the wealth goals are met?
- What’s the risk tolerance level of prospective members of the club?
3. Define your contributions
- In an investment club, you define the monetary payments required by members of the club as contributions
- Each member’s contribution is defined as a monetary amount. All members may agree to make equal or different monetary payments.
- The cycle of payment may be on a monthly basis, quarterly basis or annual payment basis.
- In summary, all members can agree to contribute X amount monthly for a defined period (long-term/medium term). “Long-term” should refer to a minimum 5 yr. period or more.
- It is not necessary for everyone to contribute the same amount. A member’s ownership or stake in the club can be calculated by valuing contributions made with units of stock.
- All members should set an agreed date for contributions to commence. Funds can be transferred to a bank account opened specifically for club contributions
- Contributions can be subsequently increased in the future subject to an agreement by all parties
4. Get a legal structure
- Your investment club should get registered as a legal structure.
- All members of the club need to agree on the ideal legal structure for the purpose of the club. Options include registering a limited partnership, co-operative or a limited liability company.
- Each legal structure comes with its pros and cons. For instance, there are tax advantages that come with a partnership, however each member might be exposed to unlimited personal liability. A limited liability offers protection and is quite easy to formalize
- The agreed legal structure will ensure the investment club becomes a formal entity and all members are recognized as shareholders or partners.
A legal structure is advised for the following reasons;
- Operational activities like opening a bank account, managing member contributions or receipt of external funds, making investments etc. can be executed formally
- The legal agreement and other legal documents will outline clearly all the terms that apply to formation and purpose of the investment club
- It also helps with legal recourse if required.
5. My favorite – Follow the money
- There are different models of investment club. Some of the models in my investment club network include
- The core model (financial) – where members simply pool resources solely to invest and build other businesses.
- The business/project model – where members of the club pool resources to start a business or carry out short term projects
- The Hybrid model – where members of the club start with a savings scheme before proper investment begins
- The choice of what model to adopt is a decision for the prospective members of the club
- Each choice requires an active decision to ‘follow the money’ to grow the investment club
- Pareto principle or 80–20 rule: Vilfredo Pareto discovered that that 20% of people owned 80% of the land in Italy. It is called the power law. The power law is dominant when you follow the money
- In an investment club, active decisions need to be made on how to profit from exponential growth in your choice of investment options.
- With start-up or growth companies, a few companies attain exponentially greater value than all others. Stick with those companies.
- With securities or assets, some are more likely to yield higher returns than others. Stick with those assets or securities.
I hope this helps.
All the best as you begin your investment journey with people you’re comfortable with.
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