Continued:

  1.     Your PA should specify what the official valuation date should be for your club.  Only one valuation saved in the software should be done each month.  This is the process that determines the unit value from one month to the next.  All member transactions, like payments, withdrawals, or some expenses, are based on the last saved valuation in the software, which is why only the official one should be saved.

 2.     When a club first starts, its usual commencing unit value is $10 to buy one unit.  That lasts only until you have your first expense, or make your first stock purchase.  From then on, the unit value will vary each month.  It is computed easily enough in concept.  Each month’s unit value is determined by dividing the total club value, cash and stock prices on the valuation date, by the total number of units all active members hold at that time.  The bottom lines on the Valuation Statement show all these factors, and give you what the current unit value is, and also what percent of a unit your original $10 will buy this month.  Differing unit values each month mean a $50 member payment won’t buy the exact same number of units every month.   That is why two people can both have $1000 in the club, but if they put it in at different times, they will have a different number of units, and therefore different total value.   And yes, it is fair, the very fairest way to handle club contributions.  Each person has his contribution working for the time he has it paid in.  Buying shares of a mutual fund is done the same basic way. The software takes care of it very easily.   Imagine trying to do it in a notebook.

 3.     On the Valuation Statement, most of the security columns are self-explanatory.  The Market Value of stocks shown is the closing price at the end of the day the Valuation Statement is based upon, not the day it was printed.  The following column represents the percentage that particular stock is of the club’s total value, which includes cash.  Scanning that can tell you if you have way too much in any one stock, or if another is such a small percent, you either need to sell it, or buy more of it if is a good value at the time. 

 4.     The last column on the Valuation Statement, if chosen, would be the Compound Annual Return (CAR) of each security from the time it was purchased, unless a later beginning date was selected.  If that stock has been getting less than at least 10% CAR for some time, it might be time for review to see if another selection would bring a better return.  CAR is accurate but misleading for stocks held less than one year, since it is an annualized figure.  The final figure in the Totals line represents not only current securities, but those owned in the past, to show your club’s average portfolio return.   

 5.     On the Individual Valuation Units Ledger you should expect to get at the end of the year, check to see that the number of units purchased varies each month.  Except at the very beginning when there have been no expenses and no stock purchased, these values will change each month, unless there has not been a valuation saved in between, which is something that should be corrected.  If you don’t show funds posted that you believe you paid, now is the time to clear it up.

 6.     Another report you should ask to see at the end of the year is a Transactions Summary.   This report is the easiest one to follow the various categories of transactions the club has had during the year.  This is a good way for members to help audit the club accounting. 

 7.     In line with verifying accurate club accounting, this is a responsibility of the whole club, not just the treasurer or officers.  If you don’t understand something, ask.   If they don’t know, nudge them to find out.  I have seen a club’s database where for an entire year, individual payments were not posted to the members who paid them.  The clueless treasurer had posted the whole amount as Income, so cash balanced, but no one had questioned that their unit values weren’t climbing each month. 

Please post any questions or clarifications you would like on any of this material. 

Gene,

Thank you for your expertise advise!  I feel I have benefited from reading the Treasurer's Workshop Classroom Forum.   The payments and fees was the most enlightening topic for me.

Minette

> To avoid writing a club check for small out of pocket items like postage, you could accumulate those tickets until they reach a certain amount for reimbursement, done within the tax year spent. <

You could also reimburse the member with club units.

See http://biwiki.editme.com/ClubExpensesReimbursing .

Musings on Withdrawals:

You not only can, in my opinion you should, on any provision that is no longer applicable to your club's operations.  This particular provision which even now shows up in sample PA's is grossly outdated and unfair.  Why would you want to penalize your club member, presumably some level of friend, who has reached the time he needs to withdraw from the club?   Membership in an investment club is not til death do you part, requiring alimony to get out of it.  Do you think you should leave 3% or more behind for the other club members to share by the increase in their unit values when you leave the club?   Do you know who really benefits from those exorbitant fees?  The very last people who leave the club when it disbands, that is who.   Read this article at http://biwiki.editme.com/WithdrawalPenalty  and while you are there, browse around some of the other fine contributions.

Gene,

Great job! If you don't mind, I'll jump in now with a few comments on specific questions/answers. (Heck! even if you do mind, it'll be too late for you to stop me. )

Ira Smilovitz 

Audralyn,

I echo Gene's sympathy for your situation. I am currently working with a club in NJ that is reviewing 13 years of poor recordkeeping (we're almost done), and would be more than willing to help out if you'd like. I can be contacted at iras1@aol.com.

Ira Smilovitz

Posted By Gene Rooks on 06/07/2007 6:15 PM
Madeleine, REIT's can be a wonderful investment.   The reason you sometimes are warned away from investing in them is that they, like royalty trusts and limited partnerships, pay dividends and various capital returns during the year, but usually after the end of the year, they send out amended reports on how their payments should be classified.   These late reports can come out as late into the tax season as April, and most club members have been clamoring for their K-1's since January.  Of course, they really should not expect them until late February or March.  If you have already done your reports, you would then have to redo them, and so would any members who have already filed.   I'm not saying it can't be done, just know what you are getting into before you approve your club making that sort of investment. 

Gene glosses over the problem. REITs can make up to 5 different types of distributions (qualifying dividend, ordinary dividend, return of capital, capital gain, Unrecaptured Section 1250 gain). Usually their distributions are a combination of 2 or more of these types of distributions, each of which receives different tax treatment and needs to be entered differently in the various software programs. Unfortunately, the split of the distributions into the various types is rarely known before year end and often not until February or March.

Another glitch with some REITs is that they can make distributions in January which are taxable in the preceding year. There are workarounds to deal with this, but my opinion is that the investment returns from REITs aren't sufficiently large to compensate for the extra work the treasurer does.

Ira Smilovitz

Stan,

Congratulations for taking a proactive role as your club's new treasurer. Here are my thoughts on some of your issues.

For stock purchase and sales, fee’s and commissions, I agree it should be allocated by ownership share. Conversely I think for those expenses incurred because we are in a partnership such as annual updates to CA3, BI memberships, tax printing software, and tax time postage they should be allocated equally. We all benefit equally from these expenses. The way I see it, those that were delinquent are not paying their share of these common expenses, but those who paid on time each month were being penalized. Is this Fair?

Fair, like beauty, is in the eye of the beholder. My personal preference is to allocate all deductible expenses on a proportional basis (that is, by ownership share). I look at the investment club as the entity, separate from its members. The club needs the software, postage, etc. (However, I would agree that the individual portion of the BI dues should be allocated equally, or better yet, paid with non-club funds). Why not allocate the earnings equally if you're going to allocate the expenses equally? Equal allocation of expenses may make it more difficult to recruit new members should you choose to do so (and provided the potential member understands all of the provisions of your PA). Having said all that, whatever your club members agree to is fair for them.