The following write-up is me gathering some of my answers to questions on Investment Groups over the past couple years. To date, I have been answering the questions one at a time, trying to answer the specific questions individually. But, what I have been finding is that a number of people are asking the same questions (or at least they sound similar to me).
So, I thought I would gather up past email responses and put together my own FAQ sheet on setting up an investment group and tax based questions. The following is may attempt at providing a quick and easy way for future questions to be answered. NOTE: If the following does not answer your questions, please email me and I will respond as best I can.
While reading the answers to the questions, please keep in mind that I am not an "expert" in legal, financial, or taxation topics, and these answers are simply what I have been able to discover on my own to date. Also, all of the answers are based on the investment club being within Canada, and hence abiding by Canadian legal and taxation restrictions (to the best of my knowledge).
We did not take any special precautions regarding legal stuff other than having a constitution and a couple papers for members to sign. These papers, one for the group itself, and one for our broker, simply identify that the person is part of the group.
We are not incorporated nor registered with any level of government, however we are registered with our brokerage house: National Bank Financial (but it isn't anything truly formal). The registration we did with the broker was so that they could keep track of the number of members within the group. I believe that there is a limit of 50 members within one of these groups. I think that the brokerage house must set us up as a different designation if we go over 50 members, but I'm not certain of this. I am not aware of any requirement to legally register an investment group.
Note that any investment broker would go out of their way to sign up a group of individuals with the potential of investing large sums of money.
As for formal paperwork, each investment club should have a constitution which enables perspective members to review your methods of investing and bylaws prior to joining. The Peaks and Valleys constitution is online, you can copy it if you like. Note that we have the special piece about members being able to withdraw 75% of their profits every quarter. This is not normal and you probably don't want to complicate your group this way unless your members want it.
The only rules of thumb that I can think of are:
Investment clubs must provide year end statements to their members identifying the:
which the club had made over the given year. Note that unrealized profits are not reported to the government by anyone, so the club doesn't have to report them to the members.
There are 2 different ways to attribute the 3 types of reportable profits/losses to the club's members. Both methods require that the club keep track of the 3 types of reportable profits/losses.
Also note that the second method of attributing taxes is easier for when a member leaves midway through the year!
I have personally created (along with one other member from the club), all of the monthly report tracking and accounting tools used by Peaks and Valleys. Theses tools are self-contained within one Excel spreadsheet per year (1 tab per month and one for year-end). There are also shareware and products out on the market for tracking investment groups, such as the NAIC one. The only problem is that they don't handle working in two currencies (or at least the ones I've seen), and they hide a lot of the calculations, which I wanted to ensure met with how our members wanted this group set up.
This is an open-ended question. We use many, many, many sources, including the ValueLine reports which you mentioned (not specifically the Investment Survey, which I'm not familiar with). The following is a very brief list of sources of information which we use to gather information:
Contributions purchase shares based on the share value as of the given day when you evaluate your club's value). An example, our club, is that we evaluate our club's value on the last business day of every month, and we only allow contributions and withdrawls to be processed using this club value (and share value), effectively between the last day of that month and the first day of the next month. Therefore, the sequence of events which occur during any given month are as follows (for physical example of this example, please see any one of the Peaks and Valleys monthly reports (check the dates on the left hand side of the Monthly Ownership Report)):
First day of the month (after that month's deposits, based on previous month's valuation)
Any day within the month (other than the first and last business days)
Last day of the month
Prior to first day of the next month (after the next month's deposits and withdrawls are handled)
I first want to say that dividends don't buy more shares (except for a redistribution at the end of the year, if you choose to redistribute your profits), they simply increase your club's value, and hence increase each members' value. The addition of a dividend during a month has the effect of increasing the club's total value (comparing the month-end club value to the first day of the month's value), while the club's # of shares hasn't changed for that period of time (i.e. no deposits or withdrawls allowed during the month). Hence the club's share value also increases since the club's value increased and the # of shares didn't change.
The brief answer regarding capital gains, is that any time your club increases it's value other than by Interest or Dividends, it is either realized or unrealized capital gains. UnRealized gains being paper gains (eg. stock price increases not associated with a sale), where as, Realized gains are associated with profits which the clubs has physically taken in cash through a transaction (eg. sale of a stock, option premium, etc...). Therefore, you are actually tracking both realized and unrealized gains each month, similar to your Interest and Dividend amounts.
Now, regarding redistribution of these amounts, it is your choice if you want to redistribute, and how often. The main aspect here is that whatever frequency you choose to redistribute (or never at all), the # of shares per member are adjusted each time you redistribute, along with the club's share value. Note that the club's total value does not change during a redistribution. See any one of the Peaks and Valleys Year-End reports for our redistributions (we decided to redistribute yearly, between Dec 31 and Jan 1).
Note that there are a couple of different ways to do redistributions. The first is how the mutual fund companies do theirs each year, on the last day of the year you identify each members' percentage ownership of the club and then distribute each of the Realized Capital Gains, Interest, and Dividends to each member based on their percentage ownership. The second method is how Peaks and Valleys has decided to do the redistributions (to correct some flaws in the method in which the mutual funds do theirs), each month as the Realized Capital Gains, Interest, and Dividends are introduced into the club, each member (in the club at that point in time), is distributed their percentage ownership share on paper (note that the physical distribution doesn't actually take place until the end of the year). Note that this second method incurs a lot more calculating, and if you handle multiple currencies, then the exchange rates must fluctuate throughout the year until you set a stable exchange rate on the last day of the year. Now, you must be asking why in the world would anyone (in their right mind) go through all of this extra work!?! The answer is that the mutual fund method is flawed in that if a person joins the club on the last day of the year with a large deposit (say equalling 50% of the club's value), then they would take 50% of the redistribution and be liable for the associated taxes, even though they weren't in the club during the time those gains were made (nor in the club incurring the risks associated with the time duration in which the gains or lossed were achieved). This topic has a lot more behind it, but hopefully I've given you the main thoughts...
As for the person buying out another person's position and the tax ramifications...your answer is correct, but it might be easier for you to think of your situation as two separate actions. The first person simply withdraws cash (i.e. sells his/her shares) and hence there is tax to be claim. The second person simply buys shares in the new year and hence has nothing at all to do with the previous year and it's taxes. The only rinkle here is (as noted above), taxes are based on all three of Realized Capital Gains, Interest, and Dividend profits; and each of these different sources of profit are taxed at different rates, so you need to be able to provide your members with their profits for the year broken down by the three types of profits!
I am not a professional accountant, but my views on maxing out RRSP contribtions are as follows. Whenever you can keep the government from taking "any" of your money, this is a good thing. But, this must be weighed against the potential for making profits on money (not stuck within an RRSP), should you have a need to spend those profits within the forseeable future. If you do not need the money in the near term, then putting it in an RRSP for tax free growth and a redcution in your year's tax bill is not a bad thing...just remember that you can't touch it (this is seen as both a good and a bad thing...you know...building for the future and all that).
When thinking about how much money to put into RRSPs, it is important to keep in mind the following points:
I agree with the thought that we must keep charges to a minimum (i.e. not to reduce our profits!), but our group has consciously decided to go with a full service broker (and their higher commission fees per trade), for the want to reduce other charges associated with running our investment group. I know that I'm not going to get all of the charges listed here, but the following is meant to identify the types of charges which our group is not subject to since we use a full service broker (the brokerage house picks up all of the costs):
Other intangiable benefits of using a full service broker (versus a discount service broker):
Now, regardless of our choice to reduce overall charges through using a full service broker, we are also actively trying to reduce the commissions we are charged. We consciously try not to churn our holdings. Our A group of stocks forces us to hold on to equities for the long haul...not incurring commission costs once the equity is purchased. Within our B group of stocks, while we have the opportunity to trade these equities more frequently, we limit our sales to situations when our profits will be in double digits. We hold very dear the tag line: "a profit is a profit, and a loss is a loss". We actually probably take it a bit farther: "a profit is a double digit profit, and a loss is something we don't do". We only invest in companies that we believe will appreciate over the long haul, even if we intend to trade them in the shorter term (just in case we have to wait out some short term bad times).
If you take a look at any of our monthly reports, you can see our Realized Profits (monthly and YTD), and compare them to our Commissions incurred (monthly and YTD). Now, we don't try to watch the monthly comparison, but we do watch the YTD comparison. As an example, our November 1, 1998 monthly report comparison shows that our YTD Realized gains are 4 times our YTD Commission charges!!!
The my.yahoo Main Overview Page contains dynamically updated information regarding are holdings and our stocks that we are watching. There are a number of links to a lot of information. The following brief describes the main links with respect to perfomance of our holdings. Down the left hand side of the page, you will see "Long Term", "Short Term", "MTD Long Term", and "MTD Short Term". These links get you to the following respective information: To Date (as of purchase date) performance of the A) Long Term holdings, To Date (as of purchase date) performance of the B) Short Term holdings, Month to Date performance of the A) Long Term holdings, and Month to Date performance of the B) Short Term holdings.
More information to come in this section as we get a chance to document it....
This question and answer are as of a point in time (values refered to are at the end of 4 years), but the concept of how compounded returns are calculated generically hold.
The way it works is that each year's percentage gain is compounded. This means that you are not only getting the returns on your deposits, but also on your profits from previous years, for each subsequent year....increasing your wealth quicker than if it wasn't compounded. The fact is even more positive than this - we actually compound on a monthly basis, not just yearly.
Your wealth is driven by two factors: the percentage return (the obvious one), and the number of times it is compounded (the higher and more often the better).
Your calculation of adding up the yearly percentages, give you the non-compounded return over the 4 years.
The way to calculate the total year after year compounded return is to multiply the percentages together. See the formula below:
Compounded Return = 1.160243 * 1.01643 * 1.369291 * 1.487830 = 2.40256694
Which when multiplied by 100 (to turn into percentage) and subtracting the original 100 percent (which represents the "1." in each of the above values in the equation), you get 140.2567, which is the right amount give or take a 1/10000 of a percent (rounding error due to the original calculations done with much more decimal accuracy).
The following highlights the new features associated with the new Peaks and Valleys Frames web page (all the excellent information is still available, just easier to access):
If you notice any short commings with the navigation tabs and/or their associated drop down menues, or you have some interesting suggestion to make the Peaks and Valleys navigation better, please don't hesitate to shoot me an email: email@example.com
Do to time constraints on the management of the club, not all of the web site content is maintained. The following sections of the web site are maintained on a monthly basis: Main Page (and charts), To Date Equity Transactions - Sorted by Date, My.Yahoo Holdings.
If the above FAQs and thier corresponding questions have not satisfied your specific questions, please feel free to review the abundance of information contained within each of these two sites, or please send me an email with the specific questions you have and I'll try my best to answer them.