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How to start an investment club.

Just about a year ago, Jessie Pinder got on the phone and called up a long-deferred dream. This recently divorced surgical technician wasn't calling for lottery numbers, or to book a Tahitian cruise. Instead, with retirement looming and resources shrinking, Pinder had more practical matters in mind. "I had always wanted to start an investment club," she says. "And I knew that by pooling my money with a group, we would have more purchasing power."

Pinder started by calling a half-dozen friends. This was no get-rich-quick scheme, she explained. And certainly not a dreaded "pyramid" scam. After dispelling some of these myths at the first meeting, which outlined the club's pact to religiously invest $20 per month, Pinder says some folks still seemed a bit leery. Two, in fact, never showed their faces again. But that was okay with Pinder. "I only wanted people I knew were very serious about investing," she says.

Today, the Philadelphia-based Sure Safe Way Investment Club has staying power. Its 16 members - ranging from a 26-year-old nurse to a 56-year minister - are steadfast in their efforts to boost their club's $3,000 portfolio over time. Says Pinder: "I don't even miss the $20 monthly dues."

Pinder and her friends are discovering what other investment clubs have known for years: that good research and regular deposits are all it takes to invest like a pro. In fact, over the past decade, roughly 69% of all investment clubs have matched or beaten the Standard & Poor's 500 stock index, according to the National Association of investors Corp. (NAIC) in Royal Oak, Mich. Such a track record puts professional money managers to shame: Only 19% from their ranks managed to best the S&P 500 during the same period.

Despite these surprising statistics, experts insist that the winning ways of investment clubs are no mystery. "A club can diversify its investments better than an individual could do on his or her own," explains Kevin Davis, a certified financial planner and president of Dallas-based Consolidated Financial Services Inc. In short, investment clubs offer a low-risk, low-cost way for novices to learn - and profit from - the complexities of stocks, bonds, mutual funds and other investments.

Here's how they work: Each club sets its own rules, requiring members to plunk down a set amount of money - sometimes as little as $20 per month - which it invests. Profits and dividends are typically plowed back into the portfolio, until the club reaches its financial goals.

Keep in mind, investment clubs are long-term propositions. More than 1,000 NAIC clubs have been together for 20 years or more. "Some clubs got off to a shaky start," acknowledges NAIC Chairman Thomas O'Hara. Indeed, disputes may arise over members, dues and investment picks. But, says O'Hara, "those clubs that survive the two-year start-up phase tend to do very well." He should know. The nonprofit NAIC represents 8,864 investment clubs nationwide with combined assets of $20 billion. The average portfolio size? A healthy $89,000.

Gearing Up For Profits

The first mission for a fledgling club is to build membership. Figure on recruiting between 10 and 25 members (The average NAIC club has 16 investors.) Any club with fewer than 10 may have trouble raising adequate investment capital, while larger clubs may become too unwieldy and divisive.

Though it may be a comfort to invest with friends, club members need not be bosom buddies. What's more important than your social compatibility? "Members should all have the same investment outlook," notes O'Hara. Since the premise of a club is to reap long-term gains, "people who want to be in and out of the market can be a sore spot."

Friends, relatives, frat brothers, sorority sisters and coworkers are all natural candidates for a club. Such an eclectic mix proved a successful for Sure Safe Way. But be wary of tapping a membership entirely from the office. "We suggest that only half a club's membership be made up of people who work together," O'Hara says. His logic is simple enough: It may be hard to pass up your boss for membership, "and if he or she is a horrible investor, you've got a problem."

The First Phase

Clubs don't just happen. To get started, you'll need to operate within a set structure. Pinder was able to get her club up and running in no time, thanks to the assistance of her longtime friend and club mentor, Paul G. Watkins. A retired auto worker who serves on NAIC's Delaware Valley Council, Watkins had already jump-started half a dozen clubs when he came to assist Sure Safe Way. "He helped us follow the NAIC's guidelines," Pinder says.

Your club should too. The NAIC can get you in business by helping to iron out thorny but important details, such as the legal structure of your club. For instance, rather than incorporate, which demands an avalanche of paperwork and leaves the tax door open, most clubs form partnerships. The NAIC's Investors Manual lays out step-by-step instructions on creating a legal partnership and explains how members must report investment income or losses on their individual tax returns. The manual will also show you how to file for a federal tax identification number, which you'll need to open a brokerage account.

Unlike social clubs, an investment group leaves no room for slouches. "Clubs aren't passive organizations," says Consolidated Financial Services' Kevin Davis. "Every member must play an active role." That means making decisions not only on investments, but on who'll help to run the show. Count on electing at least five officers: a president, to arrange and lead monthly meetings; a vice president, to back up the president and provide administrative support, a treasurer, to keep track of all dues and investment records; an assistant treasurer; and a secretary.

Next, you'll need to agree on monthly dues, or "deposits." Like many clubs, the members of the Alhambra, Calif.-based Achievers Ltd. Club required an initial ante of $100 apiece, then decreased the amount for regular dues. Today, each member invests a minimum of $40 a month. Explains Jerome Cannon, the club's president: "We didn't want to make the dues so high that we'd force a member out who may run into personal problems." The Achievers' required deposits are higher than the national average of $32 per month. But your club may wish to set dues as low as $20 per month.

How you handle your money is critical. Start-up clubs typically set up a checking account, with enough money on deposit to handle administrative expenses and pay off any member who bails out. "You never want to be in a position where you have to sell securities to pay departing members," advises Cannon, whose group has had one member leave due to financial hardship. To best prepare for members who jump ship, use the NAIC's agreement form. It specifies that departing members will be paid within two months and gives a formula for calculating the value of their shares.

Panning For Gold

Deciding how and where to invest your funds is a scary proposition for any club - especially since many members will be brand-new to the markets when they join.

Most investment clubs stash their cash in stocks - and with good reason. Since 1926, stocks have packed an average annual return of 10.4%, compared with 5.4% for long-term corporate bonds and 3.7% for short-term Treasury bills. What's more, stocks are the only investment vehicle to substantially outpace inflation, says Robert Oberst Sr., chairman of the International Association for Financial Planning in Atlanta.

So how can a bunch of novices score in the complex world of picking stocks? Before launching Sure Safe Way, for instance, Pinder admits that "selecting stocks was Greek to me." She even went to a financial seminar and walked away thinking she'd never be able to do it. However, after studying the NAIC's stock selection manual (not to mention being coached by club mentor Watkins), she's gained the confidence to tackle any annual report or prospectus.

Generally, most clubs require their troops to research different products, then report back to the group on potential winners and losers. Don't, however, expect instant harmony. Choosing the right stocks means discussion and often dissention. And since stock decisions must be made by unanimous vote or majority rule, notes Watkins, "there's no room for hard feelings."

The Philadelphia-based Visions Investment Club, founded by Watkins in 1990, for one, is vigilant about the stock it picks. Before the club commits to buying shares, one of its 25 members must make a presentation that covers the company's 10-year performance as well as a five-year earnings projection. The rewards of being finicky? The group's $20,000 portfolio, which holds Bob Evans Farms Inc., The Dow Chemical Co. and McDonald's Corp. among other stocks, boasts an average annual return of 11%.

When it comes to selecting individual stocks, many clubs feel most comfortable sticking with industries their members solidly know. Others snap up equities of local companies, or those whose products have great personal appeal. "It's important for members to build up their confidence about picking stocks," says Watkins. "But like a new language, it's not something you learn overnight."

Several excellent sources are available to help club members wade through murky investment terms and tactics at their own pace. Financial newsletters and publications that will become required reading include: Value Line Investment Survey (800-833-0046) a weekly newsletter that evaluates some 1,700 companies, Morningstar Mutual Funds (312-697-4305), a biweekly newsletter that rates over 1,300 mutual funds and The Moneypaper (914-381-5400), a monthly newsletter that covers the dividend reinvestment plans of more than 400 companies. Annual subscriptions cost $525, $395 and $72, respectively. If you don't want to fork over such amounts just yet, check your local library to see if it carries the latest issues.

Once a club registers with the NAIC (annual dues are $30 per club, plus $10 per member), they'll receive Better Investing, a monthly how-to magazine, and the Investment Manual-Club Edition, a booklet to help members form partnerships, keep tax records and evaluate corporate financial reports. In addition, the organization has member councils in 55 cities, which offer stock study sessions and other learning programs.

Diversification: The Golden Rule

The most prosperous clubs abide by two cardinal rules: stay fully invested at all times and diversify. One reason so many clubs continue to beat Wall Street wizards, O'Hara says, is that they don't meander in and out of financial markets. NAIC clubs rarely turn over their portfolios, reinvesting all profits, including dividends and interest. The principal of diversification means you'll spread your investments - and therefore your risk - over several industries, such as financials, health care and technology.

The Achievers are quite familiar with this concept. Back in 1985, the all-male club started off with a portfolio chock-full of utilities. Since then, they've become wiser and wealthier, branching out into other hot sectors such as petroleum and pharmaceuticals. in 1992, the Achievers' portfolio rocketed from $12,300 to $20,000 - an astounding return of 62%.

In addition, many clubs, such as the Washington Women's Investment Club (WWIC), know that diversifying helps to balance a low-risk tolerance with a desire for maximum returns. The group of 21 African-American women, formed in Washington, D.C., in 1987, debated back and forth before agreeing on how to invest their money. "We wanted something less risky than stocks, plus we wanted to keep a certain percentage of the portfolio in cash," says Robina Kerr Barlow, past chairman of WWIC's investment committee.

To shield themselves from major market swings, the club mixes mutual funds with stocks. Among their holdings: Calvert-Ariel Growth Fund and U.S. Government Trust. All together, the WWIC has 25% of its $150,000 portfolio in mutual funds and another 65% in stocks. The other 10% is set aside for capitalization loans. This well-honed investment style seems to be working: The group manages an average annual return of roughly 20%.

Using A Broker

Once you start trading equities, your club must consider if and when it needs the services of a brokerage firm. Brokers come in two stripes: full service and discount. Full-service brokerage houses, such as Merrill Lynch Inc. and Dean Witter Reynolds Inc., offer buy-sell advice as well as resources, such as stock analysts' reports. Such handholding puts many investors at ease. But their services are costly: Commissions for full-service brokers range from 2.5% to 3% per trade. That's as much as $15 off the top of a $500 investment.

Discount brokers, including Charles Schwab and Brown & Co., come at roughly half the price of full-service brokers. But they offer little in the way of stock recommendations. Investors must decide which stocks to hold or fold, while the broker merely handles the transaction.

Broker commissions are a key consideration, since they can gnaw away at club profits. This is especially true for clubs that routinely trade in odd lots (fewer than 100 shares), says Watkins. "This partially explains why many clubs really don't see a profit in the first two years."

The time to switch to a full-service brokerage is when "a club is able to consistently buy blocks of 100 shares or more," Watkins explains. With regular trades in the $3,000 range for a single holding, the sting of a broker's commission becomes tolerable, he says.

Some clubs sidestep brokers altogether and instead invest entirely through NAIC's Low Cost investment Plan. On this plan, clubs start out with a single share, paying NAIC's one-time $5 sign-on fee. Clubs purchase the first share from NAIC without having to go through a broker. Thereafter, groups must deal directly with the individual companies. Members can choose from over 110 companies, including such blue chips as Kellogg Co., Quaker Oats Co., Motorola Inc., Mobil Corp. and Upjohn Co.

Watkins has helped four Philadelphia-area clubs got started, urging them all to use the plan. This cost-effective method of investing has enabled the members of Sure Safe Way to buy high-dividend stocks, including AT&T and Synovus Corp.

Similarly, more than 1,000 companies allow investors to buy company shares through dividend reinvestment plans (DRIPs). Rather than paying out dividends, DRIPs automatically reinvest your stock profits to purchase more company shares. Even better, many companies offer discounted shares through DRIPs, taking 3% to 5% off a stock's trading price.

You may need a broker to execute your first DRIP trade. But beyond that, you buy directly from the company - usually commission-free. "By eliminating the middleman, investors can increase their returns by an average of 10% or more a year," says Charles B. Carlson, author of Buying Stocks Without A Broker (McGraw-Hill, New York, $16.95).

Thanks to DRIPs, the Achievers largely invest commission-free. in fact, the club has exclusively purchased its stock through DRIPs, including such winning equities as Equifax Inc., AT&T and Pacific Telesis Group.

Toward Bigger And Better investments

Aside from sheer capital growth, investment clubs offer their members valuable experience they can apply to a wide range of investments. Take the WWIC. Far from concentrating strictly on equities, they've taken the concept of diversification a step further by tapping into their $150,000 portfolio to fund other ventures. On top of its regular investment committee, the WWIC also has a real estate and entrepreneurial committee, each made up of seven members.

While not every club may adopt the same investment philosophy, most adhere to six simple NAIC principles: invest regularly, stay fully invested, reinvest all dividends and interest, diversify across industries, hold at least a dozen issues and, finally, focus on companies whose earnings and sales are growing faster than the overall economy.

Following these basic steps, you'll learn to enhance not just your club's till, but to build your own portfolio as well. Fueled by the knowledge they learn from clubs, the average NAIC member has managed to sock away $150,000 in personal investments. Now that's a reason to start - and stick with - a club. "We're in this for the long run," confirms the WWIC's Lewis. "We plan to be together for another 30 years."

Launching A Club * A Primer

All it takes is one person to start an investment club. Enthusiasm, you'll find, spreads like wildfire. To launch your own club, remember these basic guidelines.

* Every club has its own investing philosophy and goals. So be sure to select members with whom you have something in common, such as relatives, neighbors, church members or coworkers.

* Decide on a size for your club. Invite a minimum of 10 people, but no more than 25. Larger groups leave too much room for dissention, and small clubs have a hard time raising the capital to properly diversify.

* Contact the NAIC, 1515 E. Eleven Mile, Royal Oak, MI 48067. There's no need to reinvent the wheel. The NAIC provides a variety of materials which make it fairly painless to start a club, such as the booklet, An Education and Investment Opportunity for You, which details how investment clubs are organized.

* Set a dollar amount for monthly dues. Some clubs might ask for an initial ante of $100 per member, then set monthly deposits. The national average is $44 a month, though $25 is most commonly used. No matter what amount you agree upon, make it clear that members are expected to contribute each and every month in spite of market conditions. As for a meeting place, most clubs rotate meetings at members' homes.

* Discuss your legal structure. Most clubs find that a partnership is easiest to maintain, since it is not technically required to file a tax return each year. (The NAIC can help.) However, each member must report the club's earnings - including dividend and interest payments, capital gains and losses - on his or her tax return.

* Adopt an investment strategy. This includes the risk tolerance of the group, which may be conservative, aggressive or a combination of both. Create a mission statement that spells out your investment objectives. From that point, decide what you are going to invest in: stocks, bonds, mutual funds and/or real estate. (You'll want a diversified portfolio to protect yourself against major market swings.) Draw up a written agreement on this investment philosophy.

* Formalize your operating procedures, which should be a part of your bylaws. Elect officers, assign individual responsibilities and possibly even appoint a committee to handle the actual transactions.

* Open a checking account in the club's name, appointing two or three members to sign off checks. Decide how to handle members who withdraw from the club. NAIC offers a formula based on the value of the club's portfolio, years of membership and number of shares. You'll want to have cash on hand to pay departing members without disrupting the club's portfolio.

* Decide whether you have enough resources to use a full-service broker. You want a banker who readily shares investment knowledge, has a similar investment philosophy and allows investment club members to use the firm's resources. Even if you use a discount broker, find out what resources are available. Before you commit to anything, make sure you understand the firm's commission rate schedule.

* Just stay focused. Remember, this is a lifelong project, not a get-rich-quick scheme. An investment club is a great way to make money over time and provide educational experience as well.
COPYRIGHT 1993 Earl G. Graves Publishing Co., Inc.
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Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:includes related article
Author:Brown, Carolyn M.
Publication:Black Enterprise
Article Type:Cover Story
Date:Apr 1, 1993
Words:3220
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