Share club starting out - your wisdom please

[heisenberg]

Hi all,

Myself and a group of 5 close friends are in the early stages of forming a share investment club.
It will begin with a small upfront payment ($500-1000 each perhaps), followed by monthly deposits of approximately $100.

For those of you out there who have been/are involved with a share club, do you have any pearls of wisdom to know when starting out?
Would you recommend starting a company or a trust?
Would you recommend having a constitution or deed drafted, and does anyone have an example deed/constitution available?

Cheers!

[BIRMANBOY]

You may be close friends now.....good luck. I have difficulty persuading myself to do something let alone attempt that on 4 other people. I have no personal experience but have talked in the past with people who were involved. General consensus (well 2 opinions anyway) was unproductive because of different risk thresholds, different levels of knowledge, different financial circumstances etc.etc etc. I believe they drafted some sort of constitution which they all agreed on. This was in the US not NZ however so best do some research or buy an hour from an accountant.
Hi all,

Myself and a group of 5 close friends are in the early stages of forming a share investment club.
It will begin with a small upfront payment ($500-1000 each perhaps), followed by monthly deposits of approximately $100.

For those of you out there who have been/are involved with a share club, do you have any pearls of wisdom to know when starting out?
Would you recommend starting a company or a trust?
Would you recommend having a constitution or deed drafted, and does anyone have an example deed/constitution available?

Cheers!

[Hectorplains]

http://www.nzherald.co.nz/personal-finance/news/article.cfm?c_id=12&objectid=11306192

I found this a good outline of the positives and pitfalls. There are constitution and deed templates on-line e.g.

https://wiki.timetotrade.eu/Investment_Club_Constitution_%26_Rules (https://wiki.timetotrade.eu/Investment_Club_Constitution_%26_Rules)
https://wiki.timetotrade.eu/Investment_Club_Constitution

[percy]

I think you may find a company structure is best.
But,But,But,But,But<but.A company needs to file tax returns,etc.
Unless you have an accountant as a member, the paper work will prove too much.
Limit your numbers to five.
I belonged to two share clubs.One ended up with negative shareholders funds in the 1987 crash,while the other just survived.
Both made a lot of money in the 1990s,and were good learning vehicles. We disbanded both because of the registers' requiring tax numbers,and the paper war looked to be about to consume all our time,leaving no time to talk about shares.
You need to make provision for a member having to leave your group.Whether someone else buys in,or you sell enough shares to pay that person out.
I now meet up with two or three friends for a morning tea and discussion.

[heisenberg]

All great stuff, thanks.

We are all in similar circumstances and have similar expectations and risk profiles. We'll likely stick mainly to index funds with perhaps 10% for speculative type investments.

Once we are all on the same page regarding investment strategy and diversification we'll draw up a constitution/deed. Following that we will undertake company creation, bank account creation and accumulation of funds. Anything I am missing?

[777]

With the amount of money you are planning on investing, will you cover the administration costs of forming and running a company. Annual company return, tax returns etc. Your $5,000 to start with and $6,000 in the first year. Total of $11,000 earning about 3-4% dividend income won't cover all your running costs.

I always subscribe to the thinking of why ruin a good friendship by going into business together.

[heisenberg]

With the amount of money you are planning on investing, will you cover the administration costs of forming and running a company. Annual company return, tax returns etc. Your $5,000 to start with and $6,000 in the first year. Total of $11,000 earning about 3-4% dividend income won't cover all your running costs.

I always subscribe to the thinking of why ruin a good friendship by going into business together.

I must be naive as to the running costs of this sort of investment group. $45 for annual filing return. We have an accountant in the group and do not anticipate requiring a lawyer at present. Keep in mind that if there are additional fees we could always use the accumulated weekly deposit from each member to pay for this on an as needed basis.

[peat]

I would start to query the point of banding together to buy mutual funds.
The way I see it the main point of pooling is to reduce transaction costs as a % hit, and to gain diversity. These are actually achieved simply by buying a mutual fund.

So you could buy funds individually , and pool the money to buy riskier stuff such as specific shares, or warrants or options.

Or just have the club purely for the purpose of discussion and let everyone transact themselves. that way your meetings are about investment and not paperwork.

Just my comments :+)

[heisenberg]

You raise a good point peat. Our group agreed that a portion of the fund is used for index funds, bonds etc and another portion used for higher risk investments. We haven't yet decided the proportion of each. What would you have thought: 30/70? 50/50? 70/30?

[peat]

that ratio is all about the risk profile
given you are a share club, and not a knitting club, we could assume risk is acceptable and maybe even a good dollop but that's what the first meeting should clearly establish
get everyone to answer the hard questions such as how would they feel if after two years you'd all halved your money. or lost it all. risk isn't all about age, though (all other things being equal) youth can take on more risk than the aged. its also about resilience and determination, income security, fall back positions etc.

but as I say given its a share club I would suggest at least 30/70, but really I'd be thinking 100% risky because the safe stuff can be done individually.

[Harvey Specter]

We have an accountant in the group
That will
Save you $500- $1000 a year. Are you going to compensate them or will they do it for the love.

Also question pooling money for index funds. Do that bit yourself and do the stock picking in the group.

[heisenberg]

Really liking the feedback everyone. Peat and Harvey you've got good points - I think I will push for that exactly: share trading in the group, index funds kept individually

[themadhatter]

Hi Heisenberg and others,

I've been lurking here for a while now, but this is the first time I've been inclined to post. I've been part of an investment club (that I helped set up) for a little over two and a half years, and for us, its been a really positive experience. What you are proposing sounds similar to where we started, with a $750 buy-in each and ongoing weekly payments of $20 (with provision in our constitution for one-off extra payments).

It started out with five of us that were all living in Tauranga - two with some experience in investing and three who were had interest in learning, but no previous share market history. The two experienced members showed the way, and we were off! It looks a bit different now though. Three of the original members have moved away for work, and we have brought in two further members. We now have seven members living all over the world (Tauranga x 2, London x 2, Auckland, Sydney and New York).

In terms of set-up, we have taken a less formal approach than has been mentioned here. We considered companies and trusts, but in the end decided to go with an unincorporated society. We figured that, while it was a little riskier, it decreased the administration workload/cost but still gave us a structure and set of rules to work within. It may not be everyones cup of tea though and I guess it will depend on the personnel involved. We haven't had any problems with it thus far. This (http://communitylaw.org.nz/community-law-manual/chapter-3-community-organisations-and-the-law/choosing-the-right-legal-structure-for-your-group-chapter-3/) gives a decent overview of what an unincorporated society is, even if it could do with a bit of tidying up formatting wise!

Early on, we spent the time to try and get things right. We had a couple of meetings to talk through our expectations and how we would manage things, before deciding on a plan and formalising our constitution and rules. The main thing here was deciding on a risk level that everyone was comfortable with. This happened over the course of a couple of months so, by the time we were ready to go, we were all comfortable with each other and clear with direction we were heading. We found a few templates for Constitution and Rules online (including the ones Hectorplains has linked above) and moulded them to what we wanted. Aside from changing voting thresholds as we've added the two new members, we haven't had to make any other changes thus far, but within the rules there is provision to do so if necessary. Like a normal club, we have a President (who runs the meetings), Secretary (takes meeting minutes) and Treasurer (provides monthly financial progress reports) as well as three traders. Everyone has an equal vote, and with 7 members we have a 5/2 majority required to make a purchase or sale.

We try to catch up at least every three months. When we all lived in the same city it was easy and a useful excuse to head to the pub! Now, being so geographically diverse, it is slightly more difficult but Skype is our medium of choice. Obviously we also stay in touch between meetings, but with seven voices it was getting a bit messy trying to do things over email. As a result, we decided to set up a private forum where we can post information and thoughts about current and potential holdings and this has worked well. We can also make buy/sell decisions here, in line with voting thresholds. At meetings, we first review the portfolio weighting of dividend, growth and speculative stocks (at present 25/60/15) and then review each particular holding we have ensuring we're still comfortable with them all. We'd then normally discuss any buy/sell proposals that have been brought to the table and vote on them. Lastly, we'll divide up any research/investigation required between members for next meeting. It seems to work pretty well.

This has actually become quite a bit longer than intended..... So, if I were to reduce our whole experience down to one key takeaway it would be:

- Take a good amount of time to get comfortable with both what you are doing, and the people you are doing it with. You want to be crystal clear about what you want to do and how you are going to do it. The rest follows from there.

Feel free to fire any questions you have my way and I'll do my best to answer them.

Cheers!

[heisenberg]

Cheers madhatter, good to read about your experience. This is quite timely as after discussing with accountants and brokers we have decided a company is going to be too much of a hassle for our purposes, and we think might well drain the fun aspect out of it. A few questions:

- Which online investment platform did you go for? ASB Securities seems to be the most popular amongst our group. Did you have any issues creating an account as an unincorporated society or have you created an account registered to one member but controlled by all?

- Any tax issues with your set up? At the end of financial year will you just divide dividends or withdrawn profits amongst the members in the group when declaring income?

- Out of interest, do you include any bonds, international shares or ETFs, and/or index funds in your portfolio?

Down the line I'd be quite interested to have a look at your groups constitution if this is at all possible- I've got the templates as mentioned above but I don't particularly like their wording.

Cheers again

[themadhatter]

No worries, happy to help.

We went with ASB Securities because one of the guys already used them. It's adequate for our needs, although I would've been seriously miffed if we needed to buy or sell on the day this (http://www.stuff.co.nz/business/industries/79713840/asb-securities-unavailable-blames-technical-difficulties) happened.... One of the options for registering an account is to set up as an unincorporated society. Link to the registration form here (http://www.asbsecurities.co.nz/story_images/ASBSecuritiesCompanyTrustEstatePartnershipRegistra tionForm.pdf). The only hassle with this, and it's pretty minor, is that you all have to go in and provide proof of identity. Doesn't have to be all together though, but the account cant open until everyone that you list as a member has been in. Those who already have an account there don't have to worry though.

No tax issues as at this stage. We applied for an IRD number as an unincorporated society and pay tax on our dividends, but at the moment we are still really just accumulating and aren't making any distributions to members (and are unlikely to for the foreseeable future).

At present we're only invested in the NZX, but would definitely consider looking at the ASX as well (which we have access to through ASB Securities). We also wouldn't rule out other markets, which is also very possible with our geographic diversity, if we can figure out a structure to support it. For the same reasons Peat and Harvey have already mentioned, bonds and funds don't really fit with the ideals of our group.

I'll check in with the other members around the constitution, but I don't see any reason why we cant let you have a look. Flick me a PM with your email address and once I get the all clear, I'll send it through.

[janner]

Is this Deja vu ???

The questions, about " Share Trading Clubs " appears to be coming up very frequently from many directions..

percy. " One ended up with negative shareholders funds in the 1987 crash "

Why perc ??? Even the brokers went broke..

Because it became almost a social requirement to be able to talk about your holdings ..

Equity.. Chase.. etc.. etc.. etc.. Blah.. Blah. Blah.

With absolutely no knowledge about the real workings of the market..

Guilty as charged M'lord.. :-)))

Now I am not saying that you Heisenberg are any where near as " Naïve " as I at that time.

Good for you asking questions on a site that CAN give you help..

Just wondering whether, as I said .. A case coming up for ... Deja vu.. ???

Aye perc ??? :-))

[trader_jackson]

No worries, happy to help.

We went with ASB Securities because one of the guys already used them. It's adequate for our needs, although I would've been seriously miffed if we needed to buy or sell on the day this (http://www.stuff.co.nz/business/industries/79713840/asb-securities-unavailable-blames-technical-difficulties) happened.... One of the options for registering an account is to set up as an unincorporated society. Link to the registration form here (http://www.asbsecurities.co.nz/story_images/ASBSecuritiesCompanyTrustEstatePartnershipRegistra tionForm.pdf). The only hassle with this, and it's pretty minor, is that you all have to go in and provide proof of identity. Doesn't have to be all together though, but the account cant open until everyone that you list as a member has been in. Those who already have an account there don't have to worry though.

No tax issues as at this stage. We applied for an IRD number as an unincorporated society and pay tax on our dividends, but at the moment we are still really just accumulating and aren't making any distributions to members (and are unlikely to for the foreseeable future).

At present we're only invested in the NZX, but would definitely consider looking at the ASX as well (which we have access to through ASB Securities). We also wouldn't rule out other markets, which is also very possible with our geographic diversity, if we can figure out a structure to support it. For the same reasons Peat and Harvey have already mentioned, bonds and funds don't really fit with the ideals of our group.

I'll check in with the other members around the constitution, but I don't see any reason why we cant let you have a look. Flick me a PM with your email address and once I get the all clear, I'll send it through.

I know this is a bit old but I have recently been informed that "clubs cannot trade on ASX via ASB Securities"... have you actually brought any ASX shares recently or tried to via the unincorporated society ASB Securities account?

Hope the portfolio is going well bang on 1 and a half years on!