Here's Why You Should Join an Investment Club

Sometimes the best investment ideas come from the people around you.

Observe the news and it's depressingly clear that Americans have become increasingly disconnected and alienated from one another. Organizations that once served as social glue, whether they're the Boy Scouts, the PTA, church, or political parties aren't what they once were. 

You can fight what's been called the "cocooning of America," and at the same time make money, by joining an investment club. 

These clubs are especially appropriate for investors looking for fresh ideas for their retirement portfolios. Nearly 13,000 investment clubs representing more than 120,000 members belong to the National Association of Investors Corporation (NAIC). Also known as BetterInvest­ing, the NAIC is a Michigan-based non-profit organization that aims to teach individuals how to become successful long-term investors. You don't have to join the NAIC to form an investment club. 

Fueling the trend toward invest­ment clubs is the burgeoning ranks of Americans with self-directed retire­ment plans. 

If you enjoy bouncing investment tips and ideas off others, an investment club can serve as an entertaining way to build your nest egg. 

Set up your club as a general part­nership. Most clubs are organized as general partnerships because it's cheap and easy. No lawyer is required. Also, partnership income only is taxed once, to individual partners. Gains, losses, deductions and credits are passed through to the partners. 

The partnership obtains from the IRS an employer identification number (EIN) to open brokerage and bank accounts. You must conduct all trading activities under this EIN. 

The club must file Form 1065, U.S. Partnership Return of Income, by April 15. This form lists the club's income and expenses. The club also must furnish to each member Sched­ule K-1, Partner's Share of Income, Credits, Deductions, etc. 

Clubs typically are organized among family members, friends, or coworkers who agree to contribute an initial amount plus regular month­ly additions. Partnership agreements can adopt equal ownership interests for each member. 

Out-of-pocket expenses related to club membership activities can be treated as miscellaneous itemized tax deductions. If your club gets together every month for, say, a restaurant din­ner, you can deduct the dinner as a legitimate expense. 

The NAIC reports that long-term capital appreciation is the top goal of most club members. Another key ben­efit, of course, is the social interaction and intellectual stimulation of like-minded people. 

Before joining or forming a cub, due diligence is as important as ever. Always ensure that the club's portfolio strategy mirrors your own goals. You'd be poorly served by a club that emphasizes rapid capital appreciation when you're an income investor who's primarily interested in healthy dividends. 

When you find a club that interests you, attend a meeting as an observer. Also scrutinize the club's track re­cord, partnership agreement, mission statement and administrative fees. 

Typically, clubs operate more efficiently with no more than 20 members. The NAIC recommends that each club require members to buy units in the club, with a set minimum. This enables the club to function as a small-scale, personalized mutual fund. 

The club's money is deposited in an account with a broker chosen by members. Since the idea behind an investment club is to conduct inde­pendent research and make informed decisions, you're better off using a discount broker. Unlike full-service brokers, discounters won't charge you for unnecessary handholding. 

Members get together (usually at a member's house or in a restaurant) to debate the investment ideas they bring to each meeting. They then vote on what to buy or sell. Club in­vestments tend to range from as little as a few hundred dollars to several hundred thousand dollars. 

Don't put all your assets in one place, though. You should maintain a separate, private portfolio to make investments that you like but the club rejects. 

For more information about in­vestment clubs and a free club starter kit, visit www.betterinvesting.org. 

Are you making the right investment moves for your retirement, or are you blowing it by making money mistakes? There are crucial steps that you should be taking now to build wealth over the long haul. To find out whether you'll have enough money in your later years, download the report: Your Ultimate Retirement Guide.

By John Persinos

Source:http://www.thestreet.com/story/13391105/1/here-s-why-you-should-join-an-investment-club.html