Remember group projects back in high school? I was never a big fan. It seemed that there was always a member of the group who didn’t complete his or her work on time – or perhaps, at all. And it also seemed that one member (usually me) ended up doing the majority of the work. So, when the words, “We’re going to work in groups on this project,” came from my teacher’s mouth, I’d be filled with dread.

But that’s just me. For other people, working with others is a boon. They are relieved not to have to “go it alone,” and they do their best work when they are focused on a single aspect of a project. (And besides, we’re not in high school anymore.)

Luckily, there’s an investment club format that matches either personality type. The enthusiastic extrovert who cheers on the group effort would likely choose a Pooled-Assets investment club, while his or her more introverted, independent counterpart might go with the Self-Directed investment club. Like many decisions in life, the answer isn’t clear-cut – it’s up to the individual. But isn’t it nice to know you have a choice?

The Pooled-Assets Investment Club
The term “pooled-assets” might be new to you, but it’s a concept you’re already familiar with. Pooled-assets is nothing more than another name for the way the most common type of investment club operates – meaning that all of the club’s members make contributions toward a common account and that money is then pooled before it is invested. In a pooled-assets club:

·        Although your money is still your money, it’s held in the same brokerage account as everyone else’s.

·        The club treasurer, using club accounting software (such as ICLUB’s Investment Club Accounting Software) keeps track of who owns what percentage of the club’s portfolio and tracks individual members’ investment returns as well as the club’s overall return.

·        When a member decides to leave the club, the treasurer performs a withdrawal and pays out the amount of that member’s ownership in either cash or stocks.

The Self-Directed Investment Club
Though it’s a less-common investment club structure, the self-directed investment club is a viable option for many investors, particularly those who prefer to compare notes with others, then invest on their own. It can also be a good match for clubs that have difficulty filling the time-consuming office of treasurer or who experience frequent membership exits and entrances – such as youth clubs, military clubs, or online clubs. In a self-directed investment club: 

·        Members still meet regularly (in person or online) and focus on stock market education and stock study.

·        Members keep their money separate and invest individually.

Both clubs engage in a lively discussion of various potential investments, reviewing company basics like the P/E ratio and chiming in on the company’s future prospects. But while members of a pooled-assets club must take a vote and decide, as a group, which stocks will be added to or eliminated from the club’s joint portfolio, each member of the self-directed club makes his or her own decision. Within the same self-directed club, then, each member can theoretically make a different decision – from choosing in any given month to purchase a stock, sell shares of a particular holding, add to a current investment, or make no move whatsoever. The biggest difference between the two formats is in making the actual investment.

Pros and Cons
Again, the type of club you choose to start or join depends on you and your circumstances. And, the choice that you make today – say, for example, if yours is a military family that moves every year or two – may be different from the one you would make at some other point in your life, such as after you retire from the military. The key is carefully evaluating each option:

·        Accountability. When you’re a part of a pooled-assets club, you know that your fellow club members are counting on you each month to do your part in both stock study and monetary contribution. Some people work best when they know others are expecting them to hold up their end of the bargain.

·        Sharing the Expenses. The pooled-assets club holds the distinct advantage of spreading the costs of investing among a number of people. This can be quite significant if, for example, your budget allows a monthly investment of $50. The commission cost for an individual investing a small sum would likely eat up a considerable percentage of the investment. This type of club allows for a larger overall investment (10 members @ $50/month = $500) and costs are spread between the members. End result – a lot more of your money goes into your investment, rather than a broker’s pocket.

·        Accounting. This is probably the biggest drawback for the pooled-asset club. No matter how you look at it, shared investment accounts complicate the accounting end. That said, improvements in accounting software – like the software available through ICLUBcentral, are making this task easier and less time-consuming than ever before. If you have a club member willing to do the job and/or you belong to a club where everyone is willing to pitch in and take a turn in the office of club treasurer, this might be less of a hurdle.

·        Accounting. Just as accounting can be a nightmarish drawback for the more traditional pooled-assets club, by the same token, in the self-directed club, this issue evaporates. There’s no need whatsoever for a club treasurer – which thereby eliminates the need for club accounting, a club operating agreement, club valuation statements, and club tax reporting – not to mention the hassle of buying out members who leave the club. 

·        Discipline. If you’re going to choose to invest via a self-directed club, you’ve got to have this – and plenty of it. When you’re a member of a pooled-investment club, you not only enjoy the on-paper benefits, such as spreading the costs and pooling funds between members, but there’s another, not so obvious benefit: motivation. It’ll be all-too-easy to skip a meeting, skip your stock study homework…and begin skipping your monthly investments in lieu of other expenses that suddenly appear on your financial horizon. Before you know it, you’re off track – and you’re the only one who knows it.

Much as I despised group projects back in high school, investment club members certainly have a lot to gain from the camaraderie of the pooled-assets club format  – which is likely why it has become the more popular of the two options. The self-directed club, however, has its place – particularly when circumstances dictate that the club’s members will be coming and going. Again, when it comes to pooled assets vs. self-directed investment clubs, there’s no right or wrong answer. The best choice is an informed one.

In my next column, I’ll be exploring Expert Tips for Club Treasurers – based on the advice of some of the best and most experienced club treasurers out there – and we just happen to be lucky enough to have them on board here at ICLUB. In the meantime, jot me a line and let me know what you’ve discovered about your own CMP. I’d love to hear from members of both types of investment clubs – or even someone who has been a member of each kind.