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How Can I Give The Gift Of Stock?

New services are coming out to help you give the gift of stock. There are pros and cons to the new offerings, but they aren’t the only options. Here are some other “old time” and newer ways you can give the gift of stock. I recently wrote an article, that led to a CBS television interview, about a new company called Stockpile that is selling gift cards in retail stores that can be used by the recipient to buy stock. There’s also a similar service called SparkGift that is based totally online. The goal of each is to make giving the gift of stock easier, which they achieve in many ways. However, there are drawbacks to each and while they bring the idea of giving the gift of stock front and center (and, in the case of Stockpile, directly to Main Street), they are not the only way to do it. Here are some other ways for you to consider giving what can be a life-altering gift this holiday season. The new Stockpile and SparkGift are both new services that allow you to buy what amounts to a gift certificate for the recipient to open up a brokerage account and buy stock. Stockpile is a more flexible platform, allowing the recipient to buy a different stock or to not buy stock at all, opting instead to put the cash toward a gift card to a retailer. SparkGift requires the gift to be used for investment or the money goes back to the gift giver. At a base level they are both good ideas, particularly because the gifts can be for very small amounts — as low as $20. However, both come with notable costs. For example, a $25 gift card from Stockpile bought at a brick and mortar store with set you back $4.95. The online version of the same gift will cost you $2.99 plus 3% of the gift value. SparkGift’s online-only service charges $2.95 plus 3%. For a small gift, that’s a big cost percentage-wise. And for Stockpile, you may not like the idea that the gift recipient can switch out to a retail gift card (note that a minor would need parental approval for this). In both cases, a big thing to keep in mind is that neither service is actually selling stock. They are selling gift cards and gift certificates with a cash value that can then be used to open a brokerage account to buy stock. So regardless of the stock you pick, the person to whom you are giving the gift doesn’t own the stock until they open a brokerage account and buy it. In the end, I think the drawbacks of these services limit their value. You might believe otherwise and I’d encourage you to look into them more deeply if you are considering making the gift of stock. But take the time to understand the good and the bad… and the costs for you and the person receiving the gift. What I did If these don’t suit your fancy, however, what are the other options? I’ve written previously about the low-cost variable annuity I created for my daughter. That required a much larger financial commitment and was more time-consuming and complicated than either of the services above. However, the only cost was time and effort to understand the product I was getting. And since I went through Vanguard, there was a lot of hand holding, which made the process much easier. Why did I go this route? First, I was able to create a broadly diversified portfolio that rebalances automatically every year. Second, a variable annuity is, essentially, a mutual fund wrapped in an insurance contract so the money can avoid taxation while it grows. Third, because it’s an insurance product, it has limits on what can be done with it — the most important to me was a penalty for withdrawing the money before retirement age. Why is that good? If, goodness forbid, my daughter is in dire need of money she can get it. But there’s a huge incentive to leave it in place. A low-cost variable annuity isn’t the right gift idea for everyone, but if you are thinking about giving the gift of stock, I urge you to at least consider it. You could even pool money with other relatives to get it started if you needed to. And even if you don’t use Vanguard, their website has lots of educational information for you to start your research. But this is far from the only option available to you. Buy a share, direct One of the oldest ways to give the gift of stock is to go directly through a company’s dividend reinvestment plan, colloquially known as a DRIP. Although many of these plans require that you own stock before you get into the plan, there’s a large number of companies that will allow you to buy stock directly, often called direct purchase plans or DSPs. You can see a list of such companies at Computershare.com . The companies on this list include names you’ve heard of like McDonald’s (NYSE: MCD ) and names you may not have, like closed-end fund Aberdeen Asia Pacific Income Fund (NYSEMKT: FAX ). Each plan is different, so you’ll need to take the time to read about the one you are interested in. But some can be cheap to get into. For example, McDonald’s direct stock purchase plan has a minimum of $100 if you are setting up the account for a child. There are transaction costs for this, including a $5 set-up fee and trading costs if you add more money (the cost varies based on the type transaction: one-time investments are $5, recurring investments are $1.50, and payroll deductions are free). So it isn’t a no-cost option, but it does create a different kind of relationship between the recipient and the company, which you may find desirable. Indeed, if you believe buying a share of stock should be looked at the same way as buying the entire company, a DRIP makes the commitment that much more material. Perhaps more interesting, if you set this program up for yourself (that requires a $500 minimum), McDonald’s will allow you to gift shares from your account to others at no cost. Give what you own Which brings up another option: gift some of the shares you own to someone through your broker. Most brokers will do it, though there will likely be costs involved. But this is a time-tested method for giving the gift of stock. The recipient will, of course, have to have a brokerage account. You could also ask to have a stock certificate issued in someone’s name. This is really old school and some companies, like Disney (NYSE: DIS ) don’t do the whole stock certificate thing anymore. That’s a shame since this is a tailor-made stock gift for a child and it’s kind of a neat idea to have a stock certificate hanging on a wall. But if you like the idea of handing someone a physical stock certificate, it’s worth calling your broker to find out more about this option. That said, there are costs involved with doing this, and, as noted with Disney, it won’t be an option with every company. But it is, at the very least, worth the homework if you think the idea sounds good. If you don’t have a brokerage relationship or simply want a different option for this approach, take a look at a service like Give a Share . This service lets you buy one share of stock to be given as a physical stock certificate. Be forewarned, however, it’s not cheap, especially if you opt for a frame. UGMA One issue that I’ve kind of glassed over is the child versus adult recipient. To be honest, you could just open a brokerage account for an adult or a child if you wanted to, and sidestep all of these other services. Some brokers don’t require minimums and offer cheap or free trades. In fact, for most of the above options you are setting up a brokerage relationship anyway. For adults the process is pretty simple, since they are old enough to handle their own affairs. They just need to provide some basic identification information. For a child, however, you’ll need to set up a uniform gift to minors account. It isn’t hard to do, but it sets up someone as a custodian to handle the account for the child until the child is old enough to manage the account themselves (usually 18). The norm is for the parent or guardian to be named on the account, so you’ll basically need to enlist another person to get a stock gift to a child done. (Children receiving a Stockpile or GiftSpark gift will need to get a parent to complete the process, too, just for reference.) There are tax issues with gifts to children you’ll want to be aware of, as well. You’ll want to check with your accountant or warn the parent of a minor to whom you’ve given a gift, but, generally speaking, a minor avoids taxation on a certain amount of income before the parent has to start reporting any income from the investment on his or her tax return. (Gift giving itself has limits, too, which you’ll want to consider, but they are well beyond the small gifts being discussed here unless you are giving Berkshire Hathaway A (NYSE: BRK.A )(NYSE: BRK.B ) shares away.) I mention these things explicitly because some people just don’t get finance. As soon as you mention money, their eyes glass over and they go to a safe place in their minds. If the person you are giving a stock gift to is like this or if the parent of the child you are giving a stock gift to is like this, you’ll want to strongly consider what you are asking of them. You could be setting up a disaster. Other “middle men” worth looking at There are also some other options to consider to get someone older started on investing. I use Loyal3 for a “family” account in which my wife, daughter, and I came up with five stocks that we buy in small increments each month. Although it isn’t a constant conversation, we frequently talk about the stocks we own. You can also use a similar service called Robin Hood . Robin Hood is a cute name because Loyal3 and Robin Hood provide free trades. Yes, you read that correctly. How do they do that? By combining your trades with others to create large batches. That said, there are fees associated with either of these services if you want to move beyond their basic set of tools. And they have some limits that you wouldn’t find with a regular brokerage account. Loyal3, for example, limits your investment choices to a relatively small list of well-known companies. But if you are looking for an autopilot option and only need basic services, both are very cheap and easy ways to go. The problem is that both services are meant for adults. However, they are specifically designed for small regular purchases and ease of use. In other words, if you started a young adult (perhaps someone who just got their first job after college) off with this type of account, you may be able to get them to start dollar cost averaging at a young age. A healthy habit and at no cost. So these may be the best bet for someone you know who is just starting out in the world. Giving the gift of stock If you are fortunate enough to understand the value of investing, I’d argue that it is almost incumbent upon you to share that knowledge. But because financial products are involved, it isn’t an easy process if you want to do more than just educate someone with words. New services like Stockpile and Loyal3 have removed layers of complication, but there are trade-offs. Still, don’t forget that some of the “old” ways of giving a stock gift can have side benefits, despite their limitations and, often, added costs. Sidestepping stock altogether, as I have done with a variable annuity, may turn out to be a good choice, too, if you want to make sure the idea of investing doesn’t mean your gift sits unappreciated and unattended. In the end, investing isn’t easy. And while setting people set up to invest is getting easier, there are still a lot of things to consider. Yes, you could buy a Stockpile gift card and pray for the best. But you could also just open a brokerage account, or give a physical stock certificate, or even set up a variable annuity to run on “autopilot.” Just take a moment to consider all the options before jumping at what seems like a great idea, because you may find choices that suit your needs, and the needs of the gift recipient, better than the new options making the news today.

Global Macro – Generate Superior Returns With Less Risk

Summary Global macro not only generates higher returns but does it with far lower risk than equities. Long-only equities have been profitable, but has had some very long and deep periods of negative returns. Not only are stocks usually in a drawdown, but over the past 20+ years, we have had two massive drawdowns that took years to make up. We at The Macro Trader are obviously fans of Global Macro as an investment strategy and even philosophy. Fortunately, the data backs us up showing that global macro not only generates higher returns but does it with far lower risk than equities. The chart below shows how you would have done if you had invested $1,000 into the Credit Suisse Macro Hedge Fund Index, SP500, and Barclays Aggregate Bond Index since 1994. As you can see, the CS Macro Hedge Fund Index did drastically better than either stocks or bonds. To be more specific, the CS Macro Index beat the SP500 by 2.11 times and the AGG Index by 2.75 times. So, that shows the returns, but what about the risk taken to achieve these returns? (click to enlarge) Global Macro vs SP500 vs Lehman AGG Bond Index We have a few different charts to display the risks taken to generate the returns in each index. First, we will show the historical drawdown charts. A drawdown is simply anytime you are not at new highs in your account. If you have $100 and lose $5 you are in a -5% drawdown. The deeper the drawdown the higher the return needed to get back to breakeven and the math, while simple, can be tricky. For instance, if you lose -50% many think you need to make 50% to get to breakeven. The reality is that you need 100% to get to breakeven. In our case of being down -5%, you only need a 5.26% return to get to breakeven, but it gets harder the deeper you get. Looking at a drawdown chart of the SP500, you can see that not only are stocks usually in a drawdown, but over the past 20+ years, we have had two massive drawdowns that took years to make up. We know them as the dotcom crash and the GFC (Global Financial Crisis). It took the SP500 57 months to recover from the dotcom crash and 50 months to recover from the GFC. (click to enlarge) SP500 – Drawdowns At the opposite end of the spectrum, we have the drawdowns of the Barclays AGG Fixed Income Index. As you can see, the AGG Index has frequent but small drawdowns with the worst one barely dropping below -5%. It only took nine months for the AGG index to fully recover from the worst drawdown and three months to recover from the second deepest drawdown. (click to enlarge) Lehman/Barclays AGG Fixed Income Index Drawdowns Finally we have the CS Global Macro Index drawdowns. As you can see, its worst drawdown was a -26.79% and its second worst was -14.94%. It took 19 months to recover from the -26% drawdown and 19 months to recover from the -14.94% drawdown. (click to enlarge) Credit Suisse Global Macro Index Drawdowns Another way to show the depth and length of the drawdowns is to plot both the equity line as well as the new-highs line. In each of the next three charts, the green line equals the highest equity line got; notice that it never dips down, and the red line is the equity curve which goes both up and down. Here is the SP500. As you can see, while it hit a new high in 2007, it then went back down. In essence it took about 12 years before investors were really making new money. While this is a worse-than-“normal” period, it is also not the first or the second time that the stock market has had a rough decade. (click to enlarge) SP500 DD and NH Looking at the AGG Fixed Income Index, we see that the drawdowns are both shallow and short. If you were in the AGG Index, you would not make the most money but you also took very little risk. (click to enlarge) Lehman-Barclays AGG Fixed Income Index DD and NH Finally, we have the CS Global Macro Index. As you can see, the drawdowns, while larger than that of the AGG index, are far smaller than the SP500 index. It kind of takes the middle route in regards to risk but it drastically outperforms both in regards to return. (click to enlarge) Credit Suisse Global Macro Index DD and NH Another way to look at the risk and return is to look at the 12-Month Rolling Returns. At any point in the chart, you are looking at the returns you would have gotten if you had invested 12-Months ago. As you can see, the SP500-red line has the highest 12-Month returns, but also the lowest 12-Month returns. The AGG Index (green line) almost always shows positive returns, but it never has a really big year. Finally, the CS Macro Index (blue line) again comes somewhere in the middle. It is positive almost as often as the bond index but the 12-Month period to 12-Month period returns are less than stocks. (click to enlarge) Global Macro-SP500-AGG 12-Month Rolling Returns Basically global macro has lower volatility and more consistent returns than the stock market and almost as consistent returns and far more gains than the bond market. The main reason that this is possible is that as opposed to either the stock or bond index a global macro fund can go long and short anything and trade derivatives on anything. Most macro managers stick to liquid instruments but that still means you have hundreds if not thousands of tradeable instruments. The flexibility inherent in global macro allows you to always find a bull market somewhere whether that is being long stocks, short stocks, long the Australian Dollar, or short the Australian Dollar. You can bet on U.S. Treasuries against German Bunds or across almost any other market relationship you can think of. Not only is global macro flexible but macro managers are famous for stringent risk management practices. It is almost cliche, but in the end risk management is one of the keys to success in any trading approach and one of the most important things that separate macro from long-only buy and hold. What about claims in the press that “hedge funds have underperformed the SP500 since the GFC?” Well that is true but if you are picking only half a cycle, then it is probably not a fair comparison. In the chart below, you can see what happened to the CS Macro Index and the SP500 from the end of 2008 until the end of August 2015. As you can see the stock market is ahead. (click to enlarge) 2009-Now Of course that was just in a bull move when everything was headed up. If instead of the end of 2008 or the end of February 2009 we use 2007 as our starting point we get a drastically different result. In this case the flexibility and risk reduction inherent in the global macro approach shines as the CS Macro Index outperforms the SP500 with both higher returns and far lower risk. (click to enlarge) 2007-Now As far back as we have data global macro has outperformed both stocks and bonds across full market cycle. On the other hand, long-only equities have been profitable, but has had some very long and deep periods of negative returns. We are obviously biased towards global macro. We have a site and run a research service dedicated to it. You could say we drank the kool-aid and live and breathe this stuff. At the same time, however, many of the most successful money managers in history have been macro managers and the data shows that when done right, it can lead to both higher absolute and risk-adjusted returns. So, while we are indeed biased, we think that the case is fairly strong in our favor.