So You Want to Start an Investment Club?
by Douglas Gerlach

Investing in the stock market can be a daunting proposition. But as any investment counselor will tell you, in order to achieve optimum measures of growth, stability, profit and low-risk with your hard-earned savings, you should maintain a balanced portfolio that includes the cash in your savings account as well as shares of common stock, or perhaps some mutual funds, money market funds, equity funds, and so on. But where to start? How do you know what stocks to buy? And when or if to sell? Will you lose everything in a market downturn? How do you find a broker who will handle your miniscule account that: a) you can trust; and b) won’t cost you a fortune in fees?

Believe me, I don’t have the answers to all of these questions. But there may have a way for you to learn more as part of an Investment Club. An Investment Club is simply a group of people who have gotten together for the purposes of investing money, and (perhaps more importantly) learning how to invest their money.

The NAIC Can Help

Investment Clubs aren't some sort of pyramid scheme that have been dreamed up out of thin air. The National Association of Investors Corporation (NAIC) is a not-for-profit organization that is devoted to individual investors and to helping small investors create and operate Investment Clubs. There are currently over 37,000 Clubs that are members of the NAIC, and about 700,000 individual and Club members.

The NAIC provides services and advice for individual investors and Investment Clubs. They also has a low-cost stock purchase plan to further facilitate members’ purchase of common stock. Some Investment Clubs have been in formation for forty years, and today the majority of Investment Clubs that belong to NAIC do better with their portfolios than the Standard & Poor’s 500 index. Some Clubs have become quite well-known, like the Beardstown Ladies, an all-women Club of sextogenarians that have published their own book about investing.

How Does a Club Work?

The rules are pretty simple, and can be modified in many ways: an Investment Club is a group of 12-15 people, usually organized as a legal partnership (primarily for tax purposes). The Club has officers, and each member is expected to participate by:

  1. attending each monthly meeting;
  2. making a minimum monthly contribution, usually $20 or so (but you could contribute more);
  3. researching and following the progress of a particular stock or family of stocks that the Club has bought or is considering for purchase.

The Club’s portfolio is determined by the members; a designated member deals with the Club’s broker to execute buy and sell orders; the value of each member’s share is determined by his/her capital contributions to the Club and the total value of the Club’s portfolio. The NAIC provides Club accounting guidelines and software that will help with the bookkeeping, and make it possible to keep track of partners who invest different amounts each month. An Investment Club depends on the involvement of all its members; there are no silent partners in successful Clubs.

At the minimum monthly contribution level of $20, almost anyone can participate in an Investment Club. The only requirements are a willingness to work and participate; and the ability to get along with the other members of the Club. As a legal partnership, you should approach the idea of a Club as going into business with fifteen people -- all fifteen have to be people you trust and people who will trust you in return.

Most Clubs have two stated goals: First, to learn about investing in stocks; and second, to make a return on their investments (and that's the order of their priority, as well). However, the liquidation value (if you said, ‘get me out of this Club and give me my money back’) of most Clubs will often be less than the capital contributions of its members during the first year or two. That is to say, investing in the stock market is a long-term proposition, and you may only see your contribution increase in value after the first year or so of a Club’s operation.

You should expect to make a long-term commitment, and the partners usually decide to include a clause that addresses the early withdrawal of funds (other than in the case of unusual circumstances).

Most Club members also eventually begin their own individual portfolios, armed with the knowledge and skills they gain from belonging to the Club.

What About the Legal Ramifications?

Most Clubs have a partnership agreement that describes their formation, and by-laws that dictate how the Club will be run. The NAIC provides examples of these documents that have been cleared in all 50 states in NAIC's Official Guide to Starting and Running a Profitable Investment Club.

In terms of tax liability, a partnership as an entity is usually not liable for taxes on the investment gain or loss, but rather each individual member is responsible for reporting his/her share in the partnership, and the gain or loss involved. Direct investment expenses are usually deductible if you itemize your tax return; as would be a potential capital loss during each year of the Club’s operation. Likewise, an increase in the value of your share in the Club would be taxable as income.

How Much Will It Cost?

Besides partners' monthly capital contributions, there is an annual fee of $35 per Club plus $14 per member to belong to the NAIC, and to receive its benefits (like the low-cost stock purchase plan, education materials, accounting forms, computer software, and other related materials). This represents quite a savings on an individual membership, and is well worth the expense. Other Club expenses (such as broker’s fees, postage and stationary) can also be incurred, but these are usually nominal. As a club grows larger, its members may wish to purchase a bond from the NAIC at minimal cost (starting at $50 per year) to protect itself from financial malfeasance. By pooling funds in the Club and using the NAIC Low Cost Plan, broker's commissions can be kept under two percent.

For More Information

Besides the information you'll find here on, NAIC can provide you with lots of tips and pointers to help you get started on the road to successful investing via an investment club. You can also contact the NAIC at:

National Association of Investors Corporation
P.O. Box 220
Royal Oak, MI 48068
810/583-4880 FAX