Benefits of an Investment Club Part 4

I have produced quite a bit of content in the past few weeks, explaining how one can benefit from an investment club economically, socially, and personally. Now, I want to illustrate an example of a solid business plan for a club, but in order to do that I will need to explain the principles behind a solid plan. Regardless of what your club focuses on for methods of investing, if this principle of true diversification is implemented you can feel better assured that consistent growth is possible.

First, an Understanding of True Diversification

Traditional clubs seem to focus on a niche, like investing strictly in either the stock market or real estate. The problem I have with that is that markets tend to shift, and I don’t mean from one industry to the next in the stock exchange, or from residential to commercial in real estate. I mean from one income stream to the next. I see the market as one giant river of money, and cash flows from this river to create streams. These streams are classified by different ways in which money is made. For more information you can read “How to Create Multiple Streams of Income ”, but the point I am trying to illustrate here is that sometimes the market may be giving more strength (cash-flow) bias to one stream over another. This means that when paper assets are weak, perhaps that is an indication to look into tangible assets like real estate or physical commodities like precious metals and proprietary businesses. True diversification is having the ability to invest in and utilize any income stream necessary to build your portfolio. If I’m running a club I want people to feel 99% confident that the club has realistic potential to aid them in achieving their dream. Once they believe, then they’ve already won half the battle.

A Road Less Travelled is Made Better with Company

One of the first benefits I mentioned about an investment club is how it saves time. Here is an example of that benefit at work:

Growing a Portfolio by Yourself

· Say you can afford to save $25 a month

· That’s $300 a year

· Say you made a total return on that $300 of 20% for the year (not bad considering 401k’s are lucky to get 15%)

· Your R.O.I is $60

· The total amount of capital you have to start the next year of investing is $360 (I’ll let you ponder what kind of investments are possible with that kind of money)

· Fast forward five years of this activity, compounding your returns year over year, and your capital will be at about $2700 by the end of those FIVE years. (phew, I hope you’re young)

Growing a Portfolio with a Club

· Say you are a contributor of a ten member club

· Each member contributes at least $25 a month

· That’s $3000 a year

· That same 20% return would mean a R.O.I. of $600

· Your group would have a total of $3600 of investment capital in just your first year

· Fast forward five years of this activity and your group will have about $27000 of investment capital, in just five years.

Note that your equitable stake within the ten member club in the example is the same value as the single individuals portfolio, but what your group is doing with that larger sum of capital is where the real benefit lies in saving time. What I mean is that members of the club could be enjoying real estate many years before the individual investor will be able to. Depending when members of an investment club start contributing, they may start receiving dividends and passive income well before they hit retirement age, whereas the individual investor will continue to putt along for years before they are able to get the capital to invest in an idea, business venture, etc. that will produce a similar passive income, without having to create debt, which would eat up that passive income.

My Solid Investment Plan

If I am considering joining an investment club then I want to see a plan that makes sense in any kind of market, regardless of inflation, deflation, or stagnation. This is what I thought about to come up with an investment plan that I personally would support, and would be willing to contribute to. My example is a multi-stage investment approach that is based on the growth of a tree. Yes, I said a tree.

I was first introduced to the concept of the investment club by watching how wealthy families work together to create generation after generation of wealth. So I thought about the metaphor behind the phrase “family tree”, and thought really what these wealthy families are doing by investing for the next generation is funding their family tree. A tree goes through several stages before it is able to fruit. The following is the multi-stage investment strategy based on said concept:

Stage 1 – Plant the Seed

First thing is first, build up your club’s seed capital, through contributions. Water the seed capital with returns through paper investments for yearly capital gains.

Stage 2 – Take Root

Once the seed capital has broken a threshold that enables cash deals, the club will begin to transfer some cash into bricks and mortar ventures (residential/commercial Real Estate) to increase net worth and equity of the member’s shares.

Stage 3 – Grow and Fruit

Bricks and mortar investment should be generating a cash flow in this stage. This revenue generated from these real estate assets now multiplies the growth of the club on top of what each member contributes. By this stage a $25 contribution each month is no longer creating the same impact it did when the club first started. The amount each member has invested in the club will only affect the size of their equitable stake. During this final stage the club should consider taking some of that revenue and reinvesting into hard asset commodities like precious metals, to protect against inflation. Commodities aside, this is the stage when the club gets really fun, because vested members are now enjoying the fruits of their labor in the form of dividends earned from their share of the investments.

Keep track of each member’s contributions and equitable stake with my Excel Investment Club spreadsheet, available now as a free download exclusively for those of you who are subscribed to the Live Free Live Rich Club