What are the Drawbacks of an Investment Club?

Like with everything good, there can be a dark side to investment clubs.  This is an unfortunate fact, because all things considered, investment clubs are very good things. 

So, then, what are the drawbacks of an investment club?

Strained Relationships

If you have formed an investment club with family or friends, you may find that severe financial losses result in strained relationships with these people.  You need to be careful to separate your personal life with your life as a member of an investment club, lest these losses -- and believe us, the possibility is there to lose a substantial amount of money as a whole -- completely obliterate what you have taken years to construct.

We recommend following your club's guidelines for dealing with conflict.  After all, the majority of you in the club are probably adults...You've passed grade school cliques and are well beyond the petty fighting in the halls of Junior High! 

Non-Participating Members

We're sure that your investment club will understand if for some reason a member can't make it to a meeting or two.  However, after a club has been established for a while, some of the individuals involved may be inclined to stop showing up, which puts the rest of you at a disadvantage.  Each member of an investment club is expected to put forth effort enough to research stocks and other financial choices so as to not land the group's finances into hot water.

Sometimes, members will pay their dues late or not at all.  While sometimes this is allowed for mitigating circumstances, some people will take advantage of clubs who allow them to do this consistently.  These unscrupulous investment club members place the group at risk of becoming a security, especially if they withdraw unfair amounts...and they may even try to rob you blind if they're not stopped.

Taxes

Depending upon how many members you have in your collective, you may or may not have to file a number of different types of tax returns.  If you have a small investment club – that is, under 100 members – you will probably only have to file as a whole as a Limited Partnership.  This requires everyone to attach Schedule K to their tax returns and file the papers accordingly.  Schedule K can be prepared for all members involved by a certified accountant; as an individual, you’ll just have to put the Schedule with your already completed paperwork. Of course, this means that you will have to hire a CPA, which can get expensive…

As with anything, take the good with the bad…and best of luck avoiding the unsavory sorts!

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