Time-tested club operations tips that will your club achieve long-term success.

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Starting and running a stock investment club are two entirely different activities and have their own sets of challenges. We discuss starting an investment club in this article. But after you form an investment club, create your partnership agreement, open a brokerage account and perhaps a bank account so that you can buy and sell stocks, what’s next? The following are some time-tested club operations tips that will help your club achieve long-term success.

1. Make Expectations of Club Members Clear

Don’t look just to fill seats. Find members who will work to make the club successful. The best way to identify members is to make sure candidates understand and agree with the club’s policies and goals. For example, a stock investment club that’s created to build wealth over the long term might not be appropriate for people looking to get rich right away.

You can make the policies and goals more concrete by getting them down on paper. Other documents should include the club’s requirements for attendance, participation, and monthly contributions. Also have prospective members look over the club’s bylaws and partnership agreement and ask questions.

If potential members are turned off by how official this all seems, that’s OK. You’re pooling money and making investment decisions, not playing squares during the Super Bowl.

2. Consider an Intern Program

Some BetterInvesting clubs have potential members go through probationary periods, just like you would at work, to ensure new members are comfortable with the club’s roles, responsibilities, and various personalities. A membership officer could serve as the liaison with potential club members during the this time to answer questions about the partnership agreement, club operations, meeting agenda, investment decisions, BetterInvesting’s stock selection and analysis process, and so on.

Stock investment clubs also might want these candidates to fully participate in meetings, including leading an investment discussion. The point here isn’t to ensure expertise — after all, potential members are joining the club to learn about investing. It’s to gauge their willingness to participate in discussions.

3. Start Making Investment Decisions as Soon as Possible

A major stumbling block of investment clubs in their first year is a failure to begin investing. After they’ve formed a stock investment club and reached agreement on meeting times, forming a partnership agreement, determining how to make investment decisions, and so on, club members often can’t take that first step.

But the best way to learn about investing is to start investing. Once real money is at work, club members will take their partnership more seriously, put more time into buy and sell decisions, and track the progress of their holdings.  

BetterInvesting's time-tested stock analysis process helps stock investment clubs sort through investment decisions. You can learn more about it by sampling our free resources for clubs.

4. Conduct an Annual Audit of Your Bank Account and Brokerage Account

This seemingly mundane task, in which club members reconcile the club’s accounting records with its brokerage account and bank account statements, should be an annual event. If accounting errors are allowed to fester over the years, correcting them becomes increasingly difficult and more painful. Consider this a routine part of a club’s annual checkup.

5. Develop a Succession Plan for Treasurers as Part of Club Operations

A main reason stock investment clubs break up, according to conversations we’ve had with former club members, is that the treasurer left the club and nobody was next in line. Clubs should name an assistant treasurer who’s fully trained on the club’s accounting procedures.

Though taking on a treasurer’s responsibilities might seem daunting, the advent of online club accounting programs that even automatically synchronize transactions made from selected brokerage accounts has made the job much easier. You can even generate tax forms automatically.

The meeting agenda should include a treasurer’s report. At that time the treasurer can walk club members step by step through financial transactions to help everyone understand what’s required.

When you join BetterInvesting, you’ll have access to a strong program of support for club operations and treasurers, including a series of annual webinars and community of volunteer experts who are eager to help.

6. Stay Away From Investments With Tricky Tax Consequences

Speaking of the treasurer, keep this critical member of your investment club happy by having a policy of not investing in equities that require special treatment or possibly delay tax filings because of their structure. Real estate investment trusts, for example, make several types of distributions during the year that might have different tax consequences.

Other problem investments for clubs are
  • limited liability companies (LLCs),
  • limited partnerships (LPs), and
  • master limited partnerships (MLPs).
Any security that directly holds a commodity such as gold or silver as its only asset also creates difficulty at tax time. Royalty trusts, which are pass-through entities, are a final trouble area for clubs.

So stick with common stocks.

7. Rotate Positions and Stock-Watching Responsibilities Among Club Members

Complacency has a tendency to set in at stock investment clubs when the same person is president year after year. Club members might become inclined to defer to those who frequently volunteer for the top posts and handle the majority of the stock research. These back-row members often are the first to leave the club; they might be making monthly contributions, but they’re not getting all the education they should from the club and creating a culture of long-term success. Clubs should have policies in place to make sure all members are contributing in regular roles and making sure they’re rotating among the various leadership positions.

Similarly, many clubs assign members to track specific stocks. Rotate stock-watching responsibilities, perhaps every year, as investors tend to fall in love with their stocks. They might ignore issues that can become long-term problems.

8. Establish Written Guidelines for Buying or Sell Investment Decisions

To avoid having a mismatch in philosophies among members when trying to make investment decisions, create a document that details the type of stocks the club is seeking. The document can include general requirements — how many years of financial data needs to be available, whether the company has recorded any earnings, or the company’s minimum size, for example — along with details regarding the potential holding period. Is the club looking at a stock’s investment potential over five years, five months, or five minutes?

Probably the No. 1 problem for stock investment clubs is knowing when to sell. Develop written criteria for selling a stock and refer to this document often. The most common reasons for BetterInvesting’s clubs include a deterioration in the company’s financial performance or a sudden change in top management. BetterInvesting publications such as the Stock Selection Guide Handbook and online education includes information that clubs might want to consider regarding selling.

9. Challenge Holdings as a Regular Part of Your Meeting Agenda

Portfolio management should be a constant activity, even for clubs interested in holding stocks for the long term. Companies typically report earnings every quarter, which should trigger at least a quick study and discussion when clubs meet. Make sure to include stock discussion on the meeting agenda.

Maintain a watch list of stocks that the club can refer to when making investment decisions regarding a current holding. Although many clubs want to hold stocks for the long term, that doesn’t mean forever, and one of the reasons for selling a stock is that the club has a better use for the funds.

10. Make Room for Fun at Club Meetings

Although investment clubs need to follow a partnership agreement, have a meeting agenda, make serious financial decisions regarding their pooled money, and conduct efficient meetings, it’s OK to have fun, too. Many BetterInvesting clubs have holiday parties, take trips, center meetings around a meal, and find ways to enjoy themselves and develop camaraderie.  

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