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April 10, 2003 - ICLUBcentral News

NAIC Software News April 10, 2003


Classic Plus: Last Chance to Grab It at a Low Price

Nothing lasts forever, so – like the snow here in Cambridge, MA – your chance to take advantage of low introductory pricing on NAIC Classic Plus will soon melt away.

Until May 1 only, you can get all the features of NAIC Classic Plus for just $69 (or for just $29 if you’re upgrading from NAIC Classic).

Remember, NAIC Classic Plus is the only software that offers both the ease of a beginner’s program, with A-to-Z tutorials on NAIC investing, and a robust feature set so that you can keep using the program to pick stocks and manage your portfolio even after you’ve mastered the basics.

For more information or to order, please visit

Investment Club Therapist: A Question of Partial Withdrawals
by Doug Gerlach

Dear Doug:

We have several charter members of the club who hold a large number of shares. In the past when people left it has put a burden on the club to distribute money to them when they left. The club has finally begun to give stock and/or money. What the charter members want to know is could we reduce our shares but still remain members and how should we do this?

- Linda

Dear Linda:

An unavoidable part of the investment club experience is dealing with departing members. That’s why member departures are (or at least should be) a component of every club’s operating agreements, outlining the specific methods and fees for cashing out members who wish to leave.

The operating agreement should also define how the club makes disbursements for members who would like to withdraw some portion of their capital account from the club. After all, an investment club membership is one part of an individual’s overall financial plan, and though members should consider their club accounts as part of their long-term investments, there may well be times when a member will need to withdraw part of their assets from the club to take care of some personal needs. Most clubs levy a small fee on withdrawals to cover expenses but also to inhibit members from seeing their club account as a ready source of cash. An investment club shouldn’t serve as an ATM machine for members.

While I think it’s a good idea for clubs to discourage members from making frequent withdrawals, I know of some clubs who include very stiff penalties for members who make a full or partial withdrawal from the club (with penalties sometimes as high as 25% or 50% of the withdrawn amount!). That’s simply excessive, and there’s no reason to impose such stringent punishment on a member who just wants some of his or her own money back.

I do understand the impulse behind such draconian withdrawal regulations (at least to a degree). Clubs can become very cost-effective investment vehicles when assets grow to a certain level. A club shouldn’t have very many fixed costs – NAIC membership and club accounting software are the two basics. With flat-rate commissions now the rule rather than the exception at discount and online brokerage firms, the more you can invest at a time, the lower the bite that commissions take from each purchase as a percentage of the total cost. The more the club has in its account, the less that is taken out for expenses and commissions, and the greater the club’s overall return will be. That’s a key advantage of investment clubs – pooling together money from a group of people in order to benefit from economies of scale.

In your case, however, it seems like you’re concerned that some members have too much money in the club.

Methinks thou doth protest too much.

All too often, clubs agonize over how to pay off withdrawing members. In my clinical opinion, there’s nothing that you have to worry about. Start out by accepting the fact that some members will withdraw, and that includes your charter members who may have significantly larger stakes in the club.

Let’s consider the issue of withdrawals in further detail so you can understand my point.

Clubs have different strategies for handling withdrawals. I have seen clubs who carry a cash cushion, sometimes as much as 10% to 20% of their total assets, solely in order to take care of any withdrawals which may arise in the future. This is a bad idea, since it means that a big chunk of the club’s portfolio isn’t working for the club, but merely sitting in a bank or money market account collecting a piddling interest rate. Clubs should aim to be 100% invested in equities, since that’s the entire point of being in a club in the first place!

You say that you’ve been paying off members with cash and stock, and that’s a good thing. IRS regulations allow an investment partnership to transfer shares of stock to departing members, and the club then defers realizing the capital gains until the remaining members depart. If the stock has appreciated a great deal in price since it was purchased, the club carries the unrealized gain on the books for an indefinite period – and deferring the realization of taxes is the next best thing to avoiding them.

This strategy only works if you have highly appreciated stock in your portfolio, though. But that’s okay – a withdrawal can actually increase the club’s overall return if the club is holding stocks that have gone down in value, too.

How’s that? Well, consider the NAIC’s Rule of Five. This rule states that for every five stocks that you buy, one will be an outperformer, three will perform in line with your expectations, and one will be an underperformer. For a club with 15 stocks in its portfolio, it’s likely that 3 of the those stocks are not living up to expectations and should probably be sold.

When a member withdraws and the club doesn’t have the cash to pay off the member, they have three options:

  1. Raise additional cash from the remaining members.
  2. Transfer highly-appreciated stock to the departing member.
  3. Sell underperforming stock in order to raise the cash.

The last two of these options can quite possibly have a positive impact on your portfolio. If the highly-appreciated stock has grown to become a large chunk of your holdings, then divesting your portfolio of part of that stock can be a good thing. Likewise, if you sell one of the dogs of your club portfolio, you might also be doing your portfolio a favor.

In your club’s case, as long as your operating agreement allows for partial withdrawals, there’s nothing preventing the charter members from taking out part of their holdings – if that’s really what they want to do. If you followed NAIC’s sample partnership agreement, then those members may need to pay a withdrawal fee, or at least the actual expenses related to their withdrawal.

Personally, I don’t see a problem with members who have larger accounts than other members, or with processing withdrawals of any size. But the bottom line is how your operating agreement handles partial withdrawals. If it doesn’t deal with the issue, then you should come up with rules and adopt them right away.

- Doug

Doug Gerlach, author of several popular investing books and websites, serves in his spare time as Secretary of NAIC's Computer Group Advisory Board. To ask Doug an investing question yourself, just write to!

CompuFest 2003 Just Around the Corner

Are you getting the most out of your NAIC Software? Does it ever seem like your personal computer is using you -- instead of the other way around? If so, then NAIC CompuFest 2003 in Anaheim, CA, is the place to be June 27-29, 2003!

At NAIC's computerized investing conference, you can learn tips and strategies for using the power of your computer to build and manage a portfolio. Special programs for teens and their families, as well as for investing Newbies, are available, as as seminars geared towards intermediate and experienced investors. ICLUBcentral staffers will be on hand to help you get started or teach you new techniques for your software, including NAIC Classic, Stock Analyst Plus, NAIC Stock Prospector and NAIC Club Accounting. In addition, you'll discover the best financial web sites to help you research stocks -- all using NAIC's time-tested investing methodology. For more information and to register online, visit

Club Notes: Three Steps to a Better Portfolio
by Joe Pulizzi, ICLUBcentral

I was organizing my past issues of Better Investing magazine the other day and started leafing through the September 2001 edition. In that issue, Kenneth Janke's column hit on a subject that is an issue for my club, and one that should be a focal point of all investment clubs. Mr. Janke, in discussing how best to follow stocks after purchase, offers some suggestions on how clubs can better manage their portfolios (page 12).

Mr. Janke advises - 

  1. Once a stock study is performed, assign the stock to a new member. This will bypass any bias the member who originally studied the stock may have on keeping the company in a positive light. Also, the original studier will probably still follow the stock, creating two members who are watching that stock.

  2. Make the club vice president the portfolio manager. The portfolio manager assigns responsibility for all stocks - who will cover the stock and when a new stock study should be performed. Mr. Janke suggests three stock updates per meeting, assigned alphabetically by the club roster.

  3. Work toward building significant positions in your holdings instead of many stocks with a few shares for each. Review the portfolio every three months for clubs to add to current holdings. No new stock studies will be performed at the review meeting.

Each of these steps will help your club better understand the portfolio you have. Many clubs buy a stock and forget about it for a while, in order to concentrate on buying other stocks. It is much more important to have a handle on what you already own, than on what you might own someday. The biggest area of concern I hear from club presidents is their dissatisfaction with their current portfolio. The above suggestions from Mr. Janke may help those concerns.

For more information about the NAIC or Better Investing magazine, go to

Investor & Education Fair in Pittsburgh

NAIC's Pittsburgh Chapter will host its 20th Annual Investor Fair and Education Expo on April 25-26. Hugh McManus, President of the National Investors Association (NIA) will deliver the keynote speech and describe the NAIC approach to finding quality companies. ICLUBcentral's Bryce Klempner will also be on hand to teach classes on NAIC Software, including NAIC Classic Plus, NAIC Stock Prospector, and NAIC Online Club Accounting. Click here for more information or to register.

For more information about the NAIC or Better Investing magazine, go to

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