A few years ago, two friends and I decided to form an investment club. We were going to be an army of three, striving for productivity and profits.
The trouble started almost immediately.
There are two kinds of investment clubs: formal and informal. Both bring members together in regular meetings to discuss stock ideas. Formal clubs create some form of partnership entity to pool and invest members' money. Informal clubs let people talk out their stock ideas and then go home and invest on their own.
In my case, I wanted an informal club. I didn't want the hassle of a formal partnership's tax implications, and at the time, I didn't have extra money to spare for the project. My goal was to learn about equities and discover others' opinions on them. Everyone seemed OK with this.
Things started to unravel during the second -- and final -- meeting. I arrived with a thesis on several stocks, including Playboy
A friend suggested that the lack of a partnership and committed money had doomed the club from the start. I certainly respect that, but in my opinion, it was a shame. I'd like to make a suggestion to individual investors who are thinking of getting together with friends who are interested in stocks: Don't form a partnership.
Instead, I recommend using individual Roth IRA accounts to make purchases based on ideas discussed during the meetings. Most investment clubs will probably generate dividend payments or sell from time to time, even if they are designed to be long-term in nature. The Roth will help individual members avoid potential tax burdens and complications.
Still dead-set on pooling your club's money? Rather than investing those aggregated funds, spend them on products that will help you find new stock ideas. These could include a subscription to an investment newspaper or one of the products offered by the Fool. Whatever resource you choose, it'll help bring your group closer together without presenting any additional financial complications.
I believe investment clubs are an important part of the individual investing culture, and I'm not saying partnerships are inherently bad things. They're just more complex. I covet simplicity. When it comes to investment clubs, the Roth IRA is my favorite way to go.
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