When learning and earning go hand in hand you're on the right track, writes John Dagge.
There's just no stopping the sharemarket at the moment. The shares benchmark, the All Ordinaries Index, sets a record, then promptly smashes it.
The question is: how do you get a piece of the action? Particularly if you find the prospect of direct share investment a little daunting.
The answer could well be investment clubs. After all, they say there's safety in numbers.
Mother of two Cath Callan (pictured third from right) helped found an investment club two years ago.
"I started as a complete novice and we all joined the club with the aim of educating ourselves about the process of buying and selling shares," she says. "We set it up to educate ourselves rather than just make money and it's definitely improved my investing knowledge."
Along with her bank balance. The group of 10 mothers started out with an initial payment of $100 and each contributes $40 a month.
They now have a $10,000-plus portfolio which has returned about 10 per cent a year.
Each member of the group monitors one stock generally a steady blue chip but the group recently decided to increase its risk profile to include at least one speculative pick in their portfolio.
As well as improving her investing knowledge and returning a steady income, Callan says the club is a great social affair.
"We've called the club Secret Women's Investment Group and you can tell from the initials that our meetings are pretty social!" she says. "We take it in turns to host the meetings and organise food and wine."
Investment clubs generally consist of eight to 15 people who meet regularly to discuss investing and review their group portfolio.
Like the SWIG women, each member contributes an initial amount and a fixed monthly amount.
Clubs work best when the members share a similar investment strategy and risk profile. Do you only want to sink your money into blue chips or do you want to actively manage a portfolio of speculative mining stocks? What percentage of each are you willing to agree on? Sort these boundaries out and choose a broker online brokers are the cheapest and easiest before committing any money.
You also need to agree on a legal structure, such as a company, unit trust or association, but a partnership is the cheapest and easiest (you don't need a solicitor, but many clubs use one).
Take the time to draw up a detailed agreement covering things like how often meetings will be held, financial contributions, the sharing of profit and losses, the stock selection process, the division and rotation of club duties (chairperson, secretary, treasurer), club entry and exit procedures, and conflict resolution processes (how many meetings can you miss before you get kicked out?).
A partnership agreement also needs to be registered with the Department of Fair Trading. The only catch with this structure is that you can't have more than 20 members and you have to reconstitute the partnership (and lodge it with the Department of Fair Trading and Australian Tax Office again) if more than 10 per cent of the membership changes within a year. A club becomes a managed investment scheme which must be registered with the Australian Securities and Investments Commission if it has more than 20 members or if members cede direct control to a manager who makes the investment decisions.
It's also best to set up a partnership account from which profits can be drawn by cheque and divided among the members or directly debited into their accounts.
The minutes of each meeting should be taken, detailing each buy or sell decision, and it's best to get the accounts audited annually. And don't forget the tax man, who considers your club is a business. As such, you'll have to apply for an Australian Business Number, tax file number and lodge an annual tax return.
"Earn, learn and have fun and not necessarily in that order," Lynne McDonough, who wrote a guide to setting up an investment club, says. It's best to host a couple of trial meetings before founding a club to ensure everyone can work together, is committed and shares the same goals and investment strategy.
Investment clubs can outperform the market and some would embarrass our leading fund managers.
But the clubs that work best are not run just to make money.
The greatest benefit you take from a club should be becoming a smarter investor.
Getting started
Hold trial meetings before formally founding the club to make sure everyone shares the same strategies and goals.
Agree on a legal structure a partnership is easiest and least expensive.
Draw up a detailed agreement.
Register your club with the Department of Fair Trading and apply for an Australian Business Number and tax file number.
Set up a partnership bank account. Funds deposited in the bank account can then be withdrawn by cheque or directly debited to individual members.
Get a broker. Online brokers are cheapest.
Keep accurate minutes of meetings.
Try to invite speakers to your meetings.
Keep in mind that investment clubs are not solely about making money. The biggest benefit you derive may be to broaden your investment knowledge.
For more information:
The Watertower Investment Partners: How We Set Up Our Investment Club, Lynne McDonough, $27, phone 9319 4999.
The Investment Club start-up kit, Susan Jackson, $175, phone (03) 9486 0122.
The Australian Stock Exchange runs courses on how to set up an investment club. See www.asx.com.au.
