Investment clubs

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2. A simple explanation of how it works

To get an immediate feel for the mechanics of an investment club, consider the following example:

'Indexbusters' is a club with 10 members. They agree to each put in £1,000 at launch, and to chip in a further £100 per month after that.

• The units of the club start with a valuation of £1, so members receive 1,000 units for their £1,000 investment. After receiving everyone's money, the club has £10,000 to invest. As long as it stays in the club's bank account, uninvested, each member's 1,000 units are worth £1,000.

• The Club invests all its cash in five different shares. By luck or skill, the value of the shares rises within a week to £15,000 (we're being generous to the Indexbusters!). There are still 10,000 units in issue, so each unit is now worth £1.50. Each member has 1,000 of them, worth £1,500 (1,000 x £1.50).

• On the last day of the first month, the assets of the club are still £15,000 and the asset value per unit is still £1.50. On the first day of the second month, the members each put £100 into the club's account by standing order.
• Here's the clever bit: the number of units they get for their £100 is not 100, but 67. That's because the allocation is based on the net asset value of the fund at the end of the previous month which in this case was £1.50.
• There are now 10,670 units in the club, and each member owns 1067. The assets of the clubs are its shares worth £15,000 and its uninvested cash of £1,000. The club decides not to invest the cash just for the moment.

• During the second month, the value of the club's shares drops, and by day 62 (the last day of the second month) they are worth only £13,000. The club still has £1,000 cash so total assets are £14,000. With 10,670 units in issue, the unit asset value is £1.31.
• On Day 63 (the first day of the third month) the 10 members each put in their £100. In return they are allocated 76 new units (100 divided by 1.31).
• On the same day, a new member joins the club. He pays the joining subscription of £1,000 + £100 for the current month, and receives 840 units (1,100 divided by 1.31).
• The 10 founder members now have 1143 units each (1,000 + 67 + 76). The 11th member has 840.
• In total the club has 12,270 units in issue (10,000 + 670 + 760 + 840). Its assets are £14,000 in shares and £3,100 in cash. The unit asset value is therefore £1.39.

And so it goes on. The units in the Club are valued at the end of every month, based on the Club's assets, and the unit price determines allocations in the following month. The advantage of this system, known as the unit valuation system (UVS), is that it establishes a basis on which new members can join and existing members can leave. It is simple, fair and flexible.

1. What is an investment club? 2. A simple explanation of how it works 3. Why join an investment club? 4. Deciding on your aims 5. Joining an existing club 6. Preparing to launch a new investment club 7. The draft constitution and rules 8. Drafting the investment strategy 9. Example of an investment strategy 10. Attracting members to your club 11. Preparing for the inaugural meeting 12. The inaugural meeting - appointment of officers 13. The inaugural meeting - key decisions 14. Things to do after the inaugural meeting 15. Starting the processes 16. Running the first meeting 17. Regular meetings - the key to success 18. The cash account 19. The capital account 20. The asset register 21. The annual general meeting 22. Tax 23. Performance measurement 24. Dealing with a member leaving 25. Conclusion

• ProShare Investment Clubs Looseleaf Manual
• Fool's Guide to Investment Clubs
• The Company of Successful Investors