At last years annual family meeting, we agreed to start some kind of extended family venture. The idea of pooling assets for investment – to use as a future pool for education expenses or for starting new business ventures was mentioned as one alternative. Each of three family units would start out making small contributions to the fund and the adults would manage it.
One of my goals as a member of the ‘elder’ generation is to provide more financial education to the younger generations than we were able to provide to ourselves and our own children as they grew up.
A solution to the above goals might be to start an investment club – limited to family members.
What is an Investment Club?
The first investment club was started around 1900 – La Peau de l’Ours (The Skin of the Bear), was started in 1904 to pool money to buy artwork, which members got to hang in their homes for 10 years. At the end of the 10 years, the artwork was sold and money returned to the investors. They got 4 times their original investment back.
In 1941, the Mutual Investment Club of Detroit was founded. It is still in existence today and their assets are currently worth millions.
To form an investment club individual investors band together to purchase assets (typically stock, although there are also real estate investment clubs). Usually they form a legal partnership, limited liability corporation or some other legal entity and elect or appoint officers from their members to handle administrative matters such as accounting, arranging meetings, handling membership recruitment and etc.
Members meet each month to learn about investing, contribute their monthly investment amount to the club, present the results of research they did to the group on a particular stock, bond, mutual fund, or property and to enjoy each others company.
Some clubs meet and do all of those things, but do not require a monthly contribution from each member.
Clubs Don’t Exist in Isolation
An investment club can belong to an association to gain support in education, research, tools to use and etc. One of the biggest associations is called BetterInvesting.Org. It provides online materials, educational sessions, local chapters which have their own association meetings, and for fee resources such as accounting software, books and training.
Some investment clubs operate online. Bivio supports online clubs. Member clubs at Bivio get an online section of the site for their club, online accounting software to use, tax help, several forums and other resources to support the individual investment club.
Clubs Make Their Own Rules
If you form your own investment club, your club members will most likely want to establish certain parameters under which the club operates and by which investments are made. Some clubs want to attract persons already familiar with investing, some clubs want beginners so they can all learn together. Some clubs are eager to take on risks with their clubs investment portfolio, others want to select only companies that meet certain growth and income criteria. By joining the club, members are agreeing to abide by the rules they draw up together.
Club Members Commit to Active Involvement
Since one of the big benefits of being in an investment club is learning how to invest, members commit to do the research on the assets and present it to other members at a monthly meeting (most clubs meet monthly). Some resources say that this research can take 7 -10 hours per member per month, plus the meeting. The treasurer may have additional time required, to collect the monthly contributions, invest them per membership direction and track the results. The club president may also have addition hours – spent ensuring that the club’s legal documents are up to snuff and facilitating member relations.
Clubs Can Be Composed of Any Kind of Membership
Some clubs are set up within immediate families as a teaching mechanism for the children. Some clubs are set up with same sex, same age participants. Some clubs solicit members from work or fraternal groups. It’s really whatever your club wants to do.
Clubs Must Follow the Law
Although typically exempt from the Securities Act of 1933 and the Investment Company Act of 1940, you should consult with a lawyer in that area of the law to verify that yours is exempt. If not, you will have a lot or rules to follow and reporting to do.
Since investment clubs collect personal data, they do need to adhere to measures in the Data Security Act – such as making sure the information is secure, not kept longer than needed and several other measures.
So, Should I Start a Family Investment Club?
Years ago, my father-in-law started a very small investment pool with my spouse and my spouses brother. They each put up a bit of money and they bought stock in a shoe company. My father-in-law would send out hand written reports once in a while, but they really never met as a group and didn’t pursue any investment research or education. They ended up about even on the money they contributed and the money they pulled out a few years later. No bad family karma resulted from that exercise.
Family Only Investment Club Pros:
- It may fulfill our stated goal to build a fund to be used for educational or business start up purposes.
- It may fulfill my desired goal to further educate ourselves, our children, our grandchildren and step-grandchildren on finances.
- It provides an opportunity to learn about investing so each family unit can invest on their own.
- It can provide (if we use the associations) external support for interactions, learning and research.
Family Only Investment Club Cons:
- It takes a minimum of 7 – 10 hours a month from each active member – we are all busy, busy, busy.
- We have only 7 adults, 1 teen and 2 children eligible to be members.
- We are spread out geographically, which could make it necessary to have virtual meetings most months.
What do you all think? Should we start a family only club? What other pros and cons do you see? Will it cause a family rift?
Do you belong to an investment club? What was your experience like?
Here are some additional resources if you want to read more on investment clubs:
- Investment Clubs and the Securities and Exchange Commission
- Better Investing
- The Motley Fool on Investment Clubs
- Investment Club Help web site
- Time to Trade on Investment Clubs
- Bivio
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{ 10 comments… read them below or add one }
These clubs sound like an interesting concept. Having family involved could be a great way to bring relatives separated by distance and age together. Also knowing who you are working with ahead of time can make joining such a club more comfortable. The only thing I worry about is, like you said, whether or not investment decisions might eventually lead to discord among family members. Money is always a tricky subject when family and friends are concerned and even the potential gains might not be worth losing the trust of a fmaily member. But some families are capable of looking past this, so this might not be a problem at all.
Ryan, thanks for commenting. I really like the idea of using them to teach the growing kids about investing.
It’s hard because this can be a great way to bring family together but if something were to go wrong like someone not pulling their weight or having a dissenting opinion, it can also hurt close family bonds. You have to weigh the risks of this and that’s going to come from understanding the personalities of your family members.
Money Beagle,
I wonder if a family could have that kind of discussion up front and come up with some agreement about how they will handle it if it does happen.
Never been in an investment club. I can see how the pros can easily outweigh the cons if you’re willing to put the time in. The best way to look at it, you basically have your own investment research department. Even if the asset you or someone else suggests doesn’t get invested in by the club, you still have the option of investing in it personally. Definitely be an interesting opportunity.
Thanks for weighing in novel investor! While researching this, I found that many people do exactly as you suggest – invest in it personally if you want. In fact, some of the clubs don’t even require a contribution from members, they just research and discuss and then do their own investing.
I was part of one in my early days at job. It was employee club. I have no connections with them after I left that job. Its very beneficial specially the sessions we brain stormed investment ideas and individual stocks.
SB – that’s good to know, thanks.
I think you and you family are incredibly brave to do this. Mixing money with family and friends oftentimes does not work, and many times strains relationships. On the other hand, the world is full of family-owned businesses.
Amanda, the jury is still out as to whether or not our family actually will do this. Lots of things could get in the way, lack of time, distance, lack of motivation, emotions and more. We’ll have to see what the annual family meeting brings!
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