Good news – and bad
Most of us know that over the very long term, equity markets are the best places to make money. However, we also know that in the shorter term they can be dangerous places in which we can lose money – something the extreme volatility in the market this summer has proved Given this, wouldn’t it be nice if there were a way for short-term investors to be in the market but at the same time be sure they will not lose money? The good news is that the financial services industry tells us there is one – in the form of Guaranteed Equity Bonds (GEBs). These are savings plans, which guarantee to return your original capital at the end of a given term (the bond part) but also pay you a proportion of the gains in the stock market to which they are linked (the equity part). So if the market falls you lose nothing, and if it rises you make money.
So what’s the catch? There are several. The first is that the money you hand over is not actually invested in equities, it is just linked to them. This means you don’t get any dividends – a problem when you think that over the past five years most of the total return from the UK equity market has come in the form of dividends. Next is the fact that while knowing that you will get your money back if the market falls is reassuring, it doesn’t mean you won’t lose out: if you take inflation into account (at say 2.5%), £100 invested today will be worth only £92.60 in real terms after three years. GEBs also vary considerably – many don’t offer you 100% of the capital return from the equity market, just a part of it. Finally, it is worth noting that the way many GEBs are structured means that any money you make is taxed as income, rather than capital gains. None of this means that all GEBs are bad investments. If you want to be in the equity market for only a short period of time – perhaps if you are nearing retirement – and the current volatility makes you nervous (as it should!) some are worth looking at. The key is to make sure that the participation rate (the percentage of the return from the market you will be paid) is as high as possible and that the capital guarantee is in cast iron. National Savings is offering a five-year capital protected bond which offers 112% of the rise in the FTSE 100, a deal that goes some way to compensating investors for the lack of dividend payments with GEBs. Abbey offers a similar plan but gives 130% of the return from the FTSE 100 up to a limit of 50% of your original investment (ie, you can never make more than 50%). These are both perfectly reasonable investments for the nervous. If you invest £1,000 now you might not make much money over five years but you would at least be guaranteed your money back even if the market collapsed. Written by Merryn Somerset Webb, Editor of MoneyWeek. Her views are
personal and investors should always seek professional advice - Read
her article every month in Saga magazine.
This article was created: 16 November 2006.
This article was last edited: 26 June 2007.
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