How to set up an investment club

Investment clubs need to be fun, profitable and educational if they are to succeed – Shaun van den Berg, PSG Online.

SIKI MGABADELI: We are talking about investment clubs now. It’s kind of like a stokvel, except you are investing in the stock exchange in this kind of a stokvel. If you have any questions about setting one up, or you are thinking about it, or you already have one and you just want to get a  sense of whether you are doing things right, you can tweet me @sikimgabadeli.
    We’ve asked Shaun van den Berg, who is head of client education at PSG Online, to join us. Shaun, thanks so much for your time this evening. It is kind of like a stokvel, right?

SHAUN vd BERG: Yes. Thanks for having me here. It is like a stokvel, just a bit more formalised, and obviously just an investment vehicle – ideally shares. But it can be anything. It’s just a getting together. And I think the big aspect to it is the education side. You are not only putting your money together, it’s also just going ahead and learning more about the market. So collectively you are learning about investing and ja, it also has a fun aspect to it.

SIKI MGABADELI:  The getting together, obviously. So how many people should typically be in one, do you think? What’s a comfortable number?

SHAUN vd BERG: A comfortable number I would say is between 10 and 15, because one of the ideas of the investment club is that you share the workload. So everybody will have a role, everybody will collectively leverage off the other people’s efforts. You don’t want to have too few, then obviously the workload is hectic. Also you don’t want to have too many because then people sit in the background and not do their side of the work.

SIKI MGABADELI:  And just contribute the money but not actually contribute to the investment decisions. If you don’t know anything about the market, how do you start one, then?

SHAUN vd BERG: Well, you get a group of friends and family together and you formally start an investment club. You’ll have a structure, and ideally should appoint what I call an education officer and you’ll have an agreed-upon agenda for the meetings and things like that. So it only has a small, tiny start but you can get books, you can get online tutorials. There is so much information available just by Googling, and that would give you some info to get started.

SIKI MGABADELI:  And how much should people be putting in, do you think? What’s the typical amount?

SHAUN vd BERG: Well, again, everybody must agree to that. It must be affordable. The idea is that you want to save between R200 and R500 each. Sometimes some clubs also like to have a joining fee, just to get those initial funds up and running. If you have 10 people in a club, you have R2 000 coming in. Yes, you’ve got to save up in such a time and once you’ve made a decision you start deciding what shares to buy. You’ve built up a bit of savings, so the arrangement must be agreed on democratically.

SIKI MGABADELI: Absolutely. I wonder sometimes if that’s a good idea. Shouldn’t you vote?

SHAUN vd BERG: Well, vote yes.

SIKI MGABADELI:  Are they popular? If they are popular, what’s popularised them now?

SHAUN vd BERG: Mm – I think in South Africa it’s slowly becoming more and more popular. It’s been around in America for many, many years. I think it’s catching on now slowly. And I think what’s making it more popular is that technology is making it easier for people to get information And I think there is just the general idea that the market is inaccessible to people out there – but just the education out there, the books and things like that, there are so many books available about investment clubs and things like that also.

SIKI MGABADELI: And Wayne, would you agree? I think the JSE has talked over the years about trying to grow its retail investor. Books can make sure that more and more people are participating as individuals in the market.

WAYNE McCURRIE: Look, I think it’s a great thing that there are investment clubs, and really no one has any one answer as to how you do investments and what’s successful. But you must just apply common sense when you do set up a club, and there are two big rules. There’s no get-rich-quick scheme, and secondly don’t put all your eggs in one basket.

SIKI MGABADELI:  Absolutely. And I think a part of that is what you said about education, Shaun – get as much information as possible, and maybe invite investment professionals to your meetings once in a while to talk to you about what is happening and what sort of trends there are.

SHAUN vd BERG: I agree. You get a bit of a different perspective. You can even get the ETF guys in – Grindrod and these [type of] guys are willing to come and talk to clubs. So you get a bit more exposure to different financial products also.

SIKI MGABADELI:  And how formal should it be in structuring it, because what if the four of us in here – me, you, Wayne and Zekes – decide to start one, and then Zekes decides he either doesn’t have the money any more or he doesn’t want to hang out with us once a month, so he no longer wants to be part of it?

SHAUN vd BERG: When you first start the club you’ll have a few meetings, feeling the market, finding the members to join. You’ll have your inaugural meeting and things like that.
    But setting up the entity is important. Historically it has always been a general partnership or a company structure. The new one a lot of people are using now is the voluntary association. But, bottom line, everything is documented, No 1. There is a club Constitution and club Rules. Everybody agrees to those. So if someone wants to leave the club, there are certain steps and things like that, etc. Ideally an investment club as a rule would say the investment club is buy-and-hold longer term, as opposed to a trading club. So people must agree to those kind of rules up front. And that’s one of the reasons why a club will fall apart – if they don’t agree on those rules up front.

SIKI MGABADELI: Because someone might decide actually “I just want my money” and walk. Then you literally are affecting everybody else.
What’s the advantage of a voluntary association?

SHAUN vd BERG: One of the challenges with a general partnership is that every time a partner leaves, that partnership agreement has to be redrawn. With a voluntary association no, it’s just a club constitution. And it’s obviously just much easier. With a general partnership you are liable for any debts – for example, if a partner’s wife goes and spends money on shoes with R10 000 debt, down the line the [entire] partnership is liable for that. A partnership association – no.

SIKI MGABADELI:  OK. And is it worthwhile opening a share trading account? The different brokerages in South Africa – would they take an investment club’s funds and invest them for the club?

SHAUN vd BERG: Well, at PSG Wealth, for example, when you register it asks you are you an individual or is it an organisation? And if one of those organisations, whether you are registering an investment club. I can talk from PSG’s side – yes, we do facilitate that. I assume other brokers would do the same.

SIKI MGABADELI: Is there a cost involved?

SHAUN vd BERG: No, there is no cost. It’s just

a normal trading account. When I refer to cost involved, there is a monthly…fee. It’s R40. But there is no joining fee or any other restriction like that, no. Just the entity and FICA documents – it’s slightly different

SIKI MGABADELI: And if you had to give someone advice now about, let’s say, starting one – what are the key things you think that they should remember?

SHAUN vd BERG: Get the right people – family or friends. I like a mixture, a bit of diversity in the club, different ages, male or female, so you have a bit of spread. That I think is important, No 1.
    And No 2 is it must be fun and sociable. If it’s not going to be fun and sociable people are not going to come to the club.
    And obviously it must be ultimately possible. So we are working towards an agenda. I think those are the three main things. It must be fun and profitable, it must be educational and there must be some fun aspect to it.

SIKI MGABADELI:  And who makes the investment decision? Is it a group decision or should you at least have, let’s say, a core group of people in case not everybody can always be at a meeting all the time?

SHAUN vd BERG: Well, I always say the person who places the order would be the club chairman. He’s the person who deals with the investment club, places an order online or whatever the case might be. But the decisions are made to trade using an investment committee. So the club itself or all the members would propose certain shares based on certain criteria, and they would bring that list right down, and the idea is that the investment committee would decide and put forward that “these are the shares we are going to buy”. And as the club they would decide.

SIKI MGABADELI:  And how often should you be…

SHAUN vd BERG: Once a month.

SIKI MGABADELI:  And make it fun. We’ll leave it there. Thanks, Shaun for your time this evening.
    Do let us know if you do set up one and how it’s going for you.

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