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I have a personal investing style which nets me exceptional returns for small investments (under $600k) and 2% - 8% better than index funds (annualized) on larger investments. Let's say my parents would like to get in on the action, but they don't have the technical skill required to execute the trades in a way that nets the same results. This style requires me to execute around 20 sell orders followed by around 20 buy orders at least once a week. I know I could technically have my parents open their own investment account and provide me with the credentials so I could make the investments for them, but given the time it takes to execute all the orders, I am looking for a way to avoid that. What would be the implications of my parents "buying into" my investment portfolio by sending me some money to invest on their behalf but putting it in my investment account?

Things I am thinking about which might be a problem are:

  1. How do I report taxes for myself and for them correctly and separately? I have a higher income and thus a higher tax rate than they do, so they wouldn't want me to pay the taxes based on my making the money and then give them what was left. They would want to pay the taxes at their rate.

  2. How do I transfer the proceeds back to them in a year or two or whenever they decide to cash out, without needing to pay taxes on it a second time?

  3. Now, what if my brother and/or sisters want to get in on the trading, as well?

Is there some easy way to do this without running afoul of the SEC and IRS which does not require me to initiate the trades in multiple different trading accounts?

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  • I know very little about these so this may be a horrible suggestion, but maybe look into investment clubs. There are some legal requirements (like you can't just say "we're an investment club!"), but I think having one might cover some of the issues you're thinking about.
    – blm
    Commented Dec 23, 2015 at 18:17
  • I question the legality of you trading in your parents' account, even with their permission. I would advise against that strongly unless you have an opinion to the contrary from a qualified professional. (If you do get such an opinion that you can validate, I'd be interested in seeing that information posted back here.)
    – user32479
    Commented Dec 23, 2015 at 22:02
  • To trade on someone else's account, you'd best get their power of attorney.
    – Peter K.
    Commented Dec 24, 2015 at 0:51

2 Answers 2

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It sounds like maybe you want an "investment club". As defined by the SEC:

An investment club is a group of people who pool their money to make investments. Usually, investment clubs are organized as partnerships and, after the members study different investments, the group decides to buy or sell based on a majority vote of the members. Club meetings may be educational and each member may actively participate in investment decisions.

These "typically" do not need to register:

Investment clubs usually do not have to register, or register the offer and sale of their own membership interests, with the SEC. But since each investment club is unique, each club should decide if it needs to register and comply with securities laws.

There's more information from the SEC here: http://www.sec.gov/investor/pubs/invclub.htm

The taxes depend on how you organized the club, i.e. if you organize as a partnership, I believe that you will be taxed as a partnership. (Not 100% sure.) Some online brokerages have special accounts specifically for investment clubs. Check around.

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i think separate accounts is the simplest way to go. if the tax breaks are significant, then the inconvenience should be worth it.

you could gift or loan money back and forth. done properly, it should be technically legal (or grey enough to not cause irs trouble). specifically, they could gift you 100k$ in january and then you could gift them 110k$ in december, leaving a net gift of 10k$ for the year from you to them, which is under the annual gift tax exclusion. based on market performance, you could gift back exactly enough to hit the gift tax exclusion and keep the rest in their "account" with you. loans would work similarly, but the irs tends to treat undocumented or interest-free loans as weird gifts. but honestly, you might just be trading day-to-day overhead for tax audit risk.

lastly, no offense meant, but i suspect that your strategy is probably just some form of martingale betting system, and you might cause some serious family strife when you eventually meet your gambler's ruin. even if everything goes smoothly, it would take some serious trust for your family to assume that you only netted them 10% roi, when your spending habits make it look like you are getting 30%. even if you used a single account, documenting the trades to their satisfaction might be more hassle than maintaining a separate account. personally, i would not trade family accord for another 2% roi.

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  • I know why you feel like it's a betting game and that it will eventually end, but back testing shows that for starting capital amounts of $10k or less, I typically get better than 100% returns per year for the first 3 - 5 years. Depending on which weeks I start in, it can be as low as 70% return in 1 year to as much as 550% return in one year.
    – user36048
    Commented Dec 23, 2015 at 21:45
  • Regardless of the week I start, there isn't a single 6 month period in which there is a negative return at least from 1999 until now. The catch is that as the working capital grows, the returns shrink. This has to do with stock price slippage and liquidity issues on the smaller capitalization stocks. It requires shifting capital into larger capitalization stocks which results in lower yields. Once the working capital starts getting into the millions, the yearly returns drop to around 18% - 25% per year.
    – user36048
    Commented Dec 23, 2015 at 21:45
  • Of course, this is all based on backtesting only at this point, and while I controlled for slippage, liquidity, and commissions, it doesn't take taxes into account and it hasn't been vetted with real money yet. I have been manually running a virtual portfolio for the past 3 weeks entering trades and as of right now, it is up 26.41% based on 60 virtually executed trades in that 3 week period while the S&P 500 is at -2.52%. Trades were entered live based on last sell price and assuming a limit order and should have executed within 15 minutes based on trading volumes.
    – user36048
    Commented Dec 23, 2015 at 21:49
  • My next step is to test it with real money, and that will commence shortly. However, if it continues to work over the next 6 months, I anticipate my family wanting to get into the action. My family is well educated and aware of the risks of investing. There are no trust issues among us, and this is highly unlikely to create any. My parents especially could use the extra money since they have no retirement savings and are nearing retirement. Since I make more than anyone else in the family, I would likely be called on to help support them anyway.
    – user36048
    Commented Dec 23, 2015 at 21:54
  • At least this way would allow me to help them grow their own money relatively quickly so that in 15 years, they have substantial savings to live on when they are most likely to be incurring large medical expenses.
    – user36048
    Commented Dec 23, 2015 at 21:57

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