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18 December 2023

Carbon’s Home Alone 2: Lost in Bad News!

As has become tradition, it is my annual Carbon Christmas Blog – where I take a much beloved Christmas classic tale and then shoehorn some loose and very tenuous financial analogies into them.

In my view I make them better by adding previously unseen depth and nuance to these classics – others might have a less flattering view. In previous years, I’ve ‘improved’ A Christmas Carol, It’s A Wonderful Life and Die Hard – one glaring omission (at least in my household) is Home Alone.

However, controversially I am going to skip Home Alone and jump straight to Home Alone 2 (mainly so I can talk about Donald Trump) so here we go – Carbon’s Home Alone: Lost in Bad News!

The house!

“What did Kevin’s parents do, to afford that house?” every year the internet asks the same question and finally I am here to answer:

Kevin’s Dad is a day-trader/stockbroker (an absolute gift for a financial blog).

Kevin’s Mum has the looser job description of ‘working in fashion’.

You are welcome!

Now, the household income is not the financial point I am making. Instead, the point I am making is even with modest growth more-and-more people are finding themselves ‘property millionaires’ and can be left with millions in illiquid property or leaving a nasty Inheritance Tax bill to their beneficiaries.

To illustrate, an in depth highly detailed and immersive bit of research I have done (Google) tells me in 1989 the ‘Home Alone house’ sold for $895,000, it then sold in 2012 for $1.6m which means it grew by 2.55% each year for the 23 years in between 1989 and 2012.

Now 2.55% isn’t an eye-watering or extreme level of growth (Edinburgh property has had almost double during the same period) but Kevin’s ‘Mom & Dad’ have hopefully retired now and with a taste for flying first class around the world – may find that they could do with some of this $1.6m to fund these travels.

In previous years the idea of Equity Release was almost a taboo subject, with horror stories of people owing more than the house is worth and horrendous associated costs. As is generally the case more and more providers have entered the market creating competition, lowering the associated costs and regulation has quickly ended the prospect of you owing more than the value of your house. Now Kevin, who protected it so valiantly, might take umbrage with the fact that he and his siblings will likely not inherit the house, but if this is not a consideration then equity release is becoming more and more of a viable conversation topic when people are looking to spend some of their ‘property millions’.

However, maybe they did have enough money that equity release never entered the conversation and they held it to death. Under UK legislation, before any other assets were taken into consideration Kevin, Buzz and their other siblings would find themselves with a tax bill of £240,000 that needed to be paid BEFORE they took ownership and could sell it. Options such as Life Rent Trusts on first death, downsizing and not keeping the house under sole ownership should have been discussed and put in place well ahead of time.

Bonus fact on this before moving on is my in-depth research/Google also tells me that in 1989, Michael Jordan was living in the same suburb as the McCallisters and now I feel robbed of the Home Alone/Space Jam crossover the 90’s was calling out for.

Active Investment Managers

Of course, Kevin’s Dad was a Stockbroker, every wealthy character in 80’s/early 90’s films made their millions on Wall Street. Compounded in Home Alone 2 by the glitz and glamour of New York, where the ‘celebrity Ding-Dang-Dong’ are living it up at the Plaza Hotel getting private limos everywhere and bumping into 45th presidents. Of! Course!

Now without sliding into social commentary around the rich/poor divide and starting social hashtags like #TheStickyBanditsWereRight – the lifestyle that Kevin and the wider McCallister clan are afforded is affluent to say the least.

Now day-traders and active investment managers are different things, but fundamentally they believe that they can actively buy and sell companies and see profits that others can’t and charge you eye-watering amounts for the privilege – so as priorly warned I’m making a large tenuous leap to my second point – stop paying active rates!

This isn’t a commentary on charging the bare minimum, but the problem with these costs is that almost all of the research shows that these active investment managers are not providing value for their associated costs.

In the latest SPIVA (Standard & Poors Index vs Active) results, they showed that over the last 12 months only 39% of active investment managers in the United States outperformed the market. Bump that up to 15 years and only 7.81% of active investment managers outperformed the market.

This is normally for two reasons. Firstly, some calls they’ll get right and some calls they’ll get wrong, but the missteps tend to be more painful especially when viewed over the long-term.

The second is their charges. Some can be as high as 3-4% per annum, with performance bonuses on top. So even if they do get some of these calls right, they need to provide a premium over a tracker fund that costs 0.4% of about 2.6% or 3.6% EVERY year.

In the Home Alone universe, this helps them jet all around the world on holidays that they cancel about 2 days in without batting an eye-lid. Keep the profits yourself and go on the holidays instead.

Bad news is everywhere

Surprisingly for a film that includes burglars who are willing to kill a child, prostitutes, homeless vagrants and Donald Trump, Home Alone 2 is a happy and uplifting film that has almost become nostalgic propaganda for a more aspirational time.

Even when Kevin lands in New York, it is hard now to look at the twin towers in the New York skylight and not feel the real-world of bad news seeping into this fairytale.

Since 2020, we seem to have just been bombarded with bad news stories and 2023 is no different. We started the year with fear of another banking crisis, the Russia Ukraine war continues to rage, the cost of living crisis continues with the head of the Bank of England commenting not to expect any rate cuts in the short-term as they grapple with inflation and then the Israel-Gaza conflict that has dominated the news more recently.

These are global events and as you would expect global events impact the global investment market, so as stock markets around the world bounce around trying to adapt – it leaves investors faced with short-term volatility and questions about the future.

Now, part of the appeal of Christmas movies is the story – Home Alone 2 would have been a terrible film, if Kevin had just gone to airport security, told them what was going on and then just waited for things to resolve themselves. So, with investments, most people want a story of how things are going to sort themselves out but the truth is you need to do the right thing and just wait for things to resolve themselves. It’s not an exciting story but it is the truth, sit tight and don’t get involved with some investment ‘sticky bandits’ who are selling you a story.

Instead, look for a different long-term story with the use of a financial plan and working out what you can do over the longer-term and start making aspirations that are rooted in the future, not the nostalgia of the past.

“Down the hall and to the left”

An iconic line from the 45th President of the United States, Donald John Trump, in Home Alone 2. Where apparently he would only allow the use of his Plaza hotel if he got to make a cameo appearance.

He’s also miles ahead in the Republican presidential nominations and looks set to get his own sequel of sorts – Trump Biden 2: Lost in 2020 – and will likely dominate the news cycle in 2024. Is he good for business? Bad for business? Will Biden or Trump elevate the stock market?

Trump in his first term saw annual growth of about 1% per annum – admittedly with the shock of Covid in 2020. Biden has seen annual growth of 5.7% per annum.

The flip-side of this is that Trump had annualised inflation of 1.9% during his term – so a real value loss of -0.9% per annum. Biden has had annualised inflation of 8.8% - so a real value loss of -3.1% per annum.

The truth of the matter is, it matters very little who the U.S. President is and these narratives of good for business/bad for business are normally totally wrong. FDR was bad for business with his ‘new deal’ and saw real growth of 6.4% per annum. Ronald Reagan was good for business and saw real value loss of -0.7% per annum during his presidency.

World events happen around presidents, very rarely because of them.

What stock markets react to is when something unexpected happens. In 2016, Hillary Clinton was odds on favourite to win and the market reacted to the shock of a Trump victory. In 2020, it was a lot closer and there was no clear favourite and the reaction to Biden’s victory was minimal.

Going into 2024, the race looks very even and as if it could go either way. Therefore, as the news cycle ramps up with these stories of ‘good or bad for business’ tune out the noise as the market has already priced in the fact that either candidate could win.

And there we have it. The Carbon Christmas Blog is complete for another year with Kevin and his Mum reuniting at Carbon’s offices around the Christmas tree, the sticky bandits have been foiled again and Gordon Wilson is about to react to the Carbon Christmas Party bill with the shock of a Plaza Hotel room service bill!

Have a Merry Christmas and a Happy New Year from all of us at Carbon.

The value of investments and the income derived from them can fall as well as rise. You may not get back what you invest.

This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice. You are recommended to seek competent professional advice before taking any action.

Tax and Estate Planning Services are not regulated by the Financial Conduct Authority.

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