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
For more information or to order, please visit www.iclub.com/plus.
Investment Club Therapist: A Question of Partial Withdrawals
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?
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
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withdrawn amount!).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:
- Raise additional cash from the
- Transfer highly-appreciated stock to
the departing member.
- 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 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
question yourself, just write to
CompuFest 2003 Just Around the
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
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 -
- 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.
- 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.
- 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
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 www.better-investing.org.
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 www.better-investing.org.
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