So just how enduring is a 'safe' investment?
Guarantees that you won't lose any money might sound good at the moment, but the gloss could wear off
Sunday 25 June 2006
Feeling queasy? Individual investors around the world might well have done over the past couple of months as stock markets have lurched up and down.
In the UK alone, in the month to 14 June, the FTSE 100 index of blue-chip companies dived from 6,042 points to 5,506.8 in a series of fierce falls - some of more than 100 points in the space of a couple of days - and ragged recoveries.
The volatility has been down to global economic setbacks such as rising inflation in the US. And while this might seem a remote reason for your investment in a unit trust to take a hit, the fortunes of all financial markets are based on confidence and plenty of distant forces can affect this.
For instance, greater than expected American inflation has sparked fears of higher interest rates over there, with the attendant threat of companies having to pay more interest on their debt to the detriment of investor returns. That in turn has prompted a share sell-off, and with so many companies around the world affected by the fortunes of the US economy, and so many funds invested there, the plunging confidence in equities has spread.
The result? Greater pressure to sell shares and hence falling prices that can wipe out months of gains.
Such rocky rides often tempt individual investors to think about moving their money somewhere safer and, as a result, fund managers, banks and other investment institutions are now busy promoting their "safe" stock market products.
These sound like the perfect investment: you benefit if the markets rise, and get all your money back if they don't.
But look more closely and you'll find there's a high price to pay for peace of mind.
"Capital-protected" individual savings accounts (ISAs) promise to give back your full original investment after a given term - usually five or six years - as well as a return based on the performance of a stock market index such as the FTSE All Share.
For example, invest your cash for five years in Abbey's Capital Guaranteed UK Equity Bond 2 and you will receive 130 per cent of any growth in the FTSE 100; if markets plunge, you get all your original money back.
The downside, though, is that if the index soars, the returns will be capped - a maximum 50 per cent on top of your capital investment.
"If [the index] grew by 25 per cent over the term of this product, someone who invested £1,000 would end up with £1,325," says Justin Modray of independent financial adviser (IFA) Bestinvest. The 25 per cent growth equates to £250 on top of the original sum and 130 per cent of this is £325.
But if the index rose by at least 50 per cent, you would get back only £1,500 , stresses Mr Modray. "The 50 per cent cap kicks in, which is why the return is not £1,650 [1.3 x £500 + £1,000]."
If such growth sounds unlikely over the space of five years, consider that in March 2003 the FTSE 100 stood at 3,287. Just three years later, the index had risen to 6,000.
For those who want more of this action but some element of protection as well, there are alternatives. For example, insurance company Skandia offers a Protected Portfolio Investment plan that allows you to benefit from fund growth without any cap. The cost, though, is being prepared to lose up to 20 per cent of your original sum if markets plunge.
Martin Bamford of IFA Informed Choice says capital-protected products have a limited role in a portfolio. "Getting access to your money before the end of the term [usually] means having to cancel the plan and the possibility of getting back less than you invested."
There are other downsides to consider. First, as the plans are largely based on indices - and not actually invested in funds - you don't benefit from dividends.
Second, capital-protected plans often "average out" the returns of the indices they follow over the final year of an investment. "While this has the effect of protecting investors from a crash near maturity," adds Mr Modray, "it also means they won't fully benefit if the index soars over that period."
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