Although their popularity has tailed off in recent years, investment clubs still exist, or a new one can be formed. They are even recognised by the Inland Revenue and have their own special tax rules. Investment clubs are groups of individuals, with a cap set at 20, who decide together what shares or other assets the club will invest in and pool their capital. As well as having a financial goal, investment clubs are a social experience with usually monthly meetings. One survey suggests up to 40% of investor club meetings are held in pubs.
Joining a club either involves finding an existing club whose rules, investment approach and budget fit your profile and requirements or starting a new club. Joining an existing club will usually mean having some personal connection to at least one of the members as they tend not to be advertised online and naturally involve a relationship of trust between members. Joining an existing club may well also involve putting up a significant buy-in sum based on the size of the existing portfolio. If an opportunity to join an existing club does arise, it is important to assess if its investment strategy, risk profile, subscription level and location are a good fit. Investment clubs can have monthly subscriptions that range from £20 to several hundred, or even thousands if the club’s members are high net worth individuals. The subscriptions are pooled to by shares or other investments chosen by consensus between the members, and pay for any additional expenses such as stock screening software subscriptions, periodicals etc.
The biggest benefit to membership of an investment club is leveraging the power of the collective knowledge and experience of members. Some might be novices to investing, others more experienced and different members may have greater knowledge and experience in particular areas of investing. Investment clubs also divide the time-consuming work of researching investment opportunities and current holdings. Being a member of an investment club is also likely to significantly speed up the learning curve for beginner investors.
If starting a new investment club, other than having an initial group of willing members, it is crucial to first form a solid club ‘constitution’, appoint officers such as secretary and treasurer, choose a bank and a stock broker. The club’s constitution will include the monthly subscription level, risk level acceptable to members, the time each is expected to dedicate and the investment goals such as target returns and timescale. How investment decisions are reached, such as voting structure is also crucial.
The most common legal structure for an investment club is that of a partnership. Incorporation means more administration and also brings tax implications. Once an investment club has been set up, HMRC should be informed. Some forms will have to be filled in and a reference number issued for the club that members will use when filling out their annual personal tax return, if the club sells some of its holdings and distributes returns or if a member wishes to liquidate their share and leave the club at any point.
HMRC also has a ‘Form 185’ that investment club treasurers should fill in and provide all members with a copy in plenty of time to complete their tax return. Investment clubs themselves are not charged corporation tax with each individual member paying tax on their proportionate share of all income or gains.
Run well, and if all members respect the rules and club’s constitution, investment clubs can really be a great way to leverage combined experience and expertise and temper rash or impulsive investment decisions. Additional benefits are that they can also be a great social experience and provide additional stimulation to keep up regular contributions into an investments pot. Maybe it’s about time the investment club made a serious comeback!