There's no such thing as a sure thing when it comes to investment

If you're promised a return on an investment, consider it from all angles, says Simon Read, as you could be losing out elsewhere in the deal

Investors running scared of the stock market are being tempted by "guaranteed" investments, but the guarantees are not what they seem. Consumer champion Which? has slammed some of them this week, warning that the investments can be riskier than they appear.

James Daley, editor of Which? Money, says: "When stock markets are falling and banks are going bust, the offer of a 'guarantee' on your savings or investments can be very appealing, but guaranteed investments are not always what they appear to be. Although not all protected investments are bad news, phrases such as 'capital guarantee' and '100 per cent protection' are bandied around far too often, and don't stand up to scrutiny. We'd advise people to beware of products which make such a bold claim – unless they're backed by the Government."

Which? highlights so-called structured products – a type of investment backed by banks often known as guaranteed equity bonds – as being confusing, complex and costly. They promise investors stock-market-linked returns without putting their capital at risk. But that can mean returns are minimal or non-existent, despite the "guaranteed" tag.

It's because most have a fixed end date at which returns are calculated. The fixed nature of that means investors do not have the option of waiting for markets to recover if the investment has not performed as they hoped. So the guarantee only relates to the cash invested, not to the predicted returns.

More seriously, some "guaranteed" investments are not covered by the Financial Services Compensation Scheme (FSCS). This can prove particularly costly, as the 6,000 British people who had a structured investment with US bank Lehman Brothers at the time of its collapse discovered. Because the investment was not protected by the FSCS, they ended up with nothing.

Even if a structured product is protected under the scheme, the protection is limited, normally to £50,000, but the investments are often targeted at people who want to invest much larger sums – which can mean they are putting the majority of their savings at risk.

"A guarantee is only as good as the company providing that guarantee," points out Adrian Lowcock, senior investment adviser at Bestinvest. He points to the fact that anyone invested with massive global insurer AIG was left sweating on their cash despite the guaranteed nature of the investments. "If the US government hadn't supported the company, their guarantee would be worthless," he says.

So while it's easy for a bank or insurance company to offer a guarantee to keep your money safe, if it goes bust, you could face a battle to get your money back. The 6,000 investors hit by the collapse of Lehmans had actually bought their products through Legal & General, which in turn had sold them through Bradford & Bingley and Alliance & Leicester branches.

"This is known as counterparty risk," explains Ed Bowsher of lovemoney. com. "Normally, the guarantee isn't provided by the plan provider itself. Instead, a guarantee is provided by a third party. If that third party goes bust, investors can end up losing all of their money."

Apart from the risk of the company proving the guarantee going bust, there's also the fact that there's a trade-off for the guarantee. So if your capital is guaranteed, that will normally mean you will have to settle for less potential growth. Typically, a guaranteed equity product will limit the growth you can gain to a percentage of the stock-market growth over the investment period. That could be as little as 40 per cent of stock-market growth.

"Whenever a product is being offered with a guarantee, there is always a price to pay," warns Lowcock. "Frequently it will be a capped performance should the stock markets rally or rise. Often, these products play to investors' fears, offering downside protection when the markets have fallen, while also providing an attractive rate of interest during that period.

"But even though they may appear to offer more attractive returns than a deposit in a bank, they are not so appealing compared to other investments when you consider the minimum timescale the investment has to be held for – often five years."

In other words, locking yourself into a guaranteed return could mean missing out on stock-market growth, which would effectively mean your investment was guaranteed to fail. Right now, that's a very powerful reason for avoiding guaranteed investments, says Ed Bowsher.

"I think there's a strong chance that the stock market will rise over the next five years," he says. "If that happens, it makes sense to receive all of the profits. In other words, put your money in a stock-market tracker. There's a risk that the stock market will perform poorly over that period, but if you buy a guaranteed equity bond, you risk partially missing out on a period of strong stock-market growth."

If you are still attracted by the idea of a guarantee, then maybe you shouldn't be thinking about investment in the stock market in the first place. If you really don't want to risk your money, maybe it would be better to put it into savings accounts – keeping no more than £50,000 in one financial institution to make sure your money doesn't fall outside the protection of the Financial Services Compensation Scheme.

Even if your capital is guaranteed and you get it back intact after, say, five years, you have to take two factors into account. First, there is the inflation effect. Even at its current low level, your money will still be worth around 11 per cent less after five years.

There's also the lost opportunity. If you had put the money into a savings account paying, say, 3 per cent a year, then with compound interest your money would have grown by almost 16 per cent over five years.

There are also other drawbacks, says David Kuo of "Guaranteed products usually come with a hefty fee. The lowest fee for a stock-market index tracker is 0.15 per cent, for instance. But guaranteed products can cost as much as 5 per cent of your original investment, which is 33 times higher.

"There are two important rules to remember about investing. The first is there are never any guarantees. The second rule is to never forget the first rule of investing."

The confusion surrounding the term "guarantee" which is attached to savings or investments means it's time for the Government to crack down on firms that offer the products, says Andrew Hagger of "There needs to be some clarification for investors as to what a guarantee entails. It is time for the introduction for some kind of Kitemark which can only be displayed if certain criteria are met – for instance, if you are guaranteed to get 100 per cent of your initial capital back as a minimum and also that the first £50,000 is covered under the Financial Services Compensation Scheme.

"Ever since the collapse of the Icelandic banks, safety has become more important than the rate of return for many savers, so it's time to get the labelling right. All we need is the financial services' equivalent of 'Ronseal', with an easily identifiable logo that signifies that you're guaranteed not to lose a single penny of your capital investment."

Get back... what you're entitled to

What compensation would you be eligible for?

The Financial Services Compensation Scheme will pay out up to £50,000 for money saved in a UK bank or building society and £48,000 for an investment product. In addition, the FSCS will pay out 90 per cent of any pension or insurance claim. You will find full details of compensation limits and how to claim at

If you save money or invest through foreign-owned companies, you may first have to claim from an overseas compensation scheme.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Suggested Topics
Arts and Entertainment
musicBand's first new record for 20 years has some tough acts to follow
peopleAt least it's for a worthwhile cause
A new app has been launched that enables people to have a cuddle from a stranger
voicesMaybe the new app will make it more normal to reach out to strangers
Liam Payne has attacked the media for reporting his tweet of support to Willie Robertson and the subsequent backlash from fans
peopleBut One Direction star insists he is not homophobic
Life and Style
healthFor Pure-O OCD sufferers this is a reality they live in
Life and Style
Sexual health charities have campaigned for the kits to be regulated
healthAmerican woman who did tells parents there is 'nothing to be afraid of'
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Trainee / Experienced Recruitment Consultants

    £20000 - £25000 per annum + OTE £40,000: SThree: SThree are a global FTSE 250 ...

    Trainee Recruitment Consultant - Soho

    £20000 - £25000 per annum + OTE £40000: SThree: As a Recruitment Consultant, y...

    Trainee Recruitment Consultants - Banking & Finance

    £20000 - £25000 per annum + OTE £40,000: SThree: SThree Group have been well e...

    Quantitative Risk Manager

    Up to £80000: Saxton Leigh: My client, a large commodities broker, is looking ...

    Day In a Page

    A roller-coaster tale from the 'voice of a generation'

    Not That Kind of Girl:

    A roller-coaster tale from 'voice of a generation' Lena Dunham
    London is not bedlam or a cradle of vice. In fact it, as much as anywhere, deserves independence

    London is not bedlam or a cradle of vice

    In fact it, as much as anywhere, deserves independence
    Vivienne Westwood 'didn’t want' relationship with Malcolm McLaren

    Vivienne Westwood 'didn’t want' relationship with McLaren

    Designer 'felt pressured' into going out with Sex Pistols manager
    Jourdan Dunn: Model mother

    Model mother

    Jordan Dunn became one of the best-paid models in the world
    Apple still coolest brand – despite U2 PR disaster

    Apple still the coolest brand

    Despite PR disaster of free U2 album
    Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

    Despite the result, this is the end of the status quo

    Boyd Tonkin on the fall-out from the Scottish referendum
    Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

    Manolo Blahnik: Flats, Englishness, and Mary Beard

    The shoe designer who has been dubbed 'the patron saint of the stiletto'
    The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

    Scrambled eggs and LSD

    Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
    'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

    'Normcore': Blending in is the new standing out

    Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
    Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

    New leading ladies of dance fight back

    How female vocalists are now writing their own hits
    Mystery of the Ground Zero wedding photo

    A shot in the dark

    Mystery of the wedding photo from Ground Zero
    His life, the universe and everything

    His life, the universe and everything

    New biography sheds light on comic genius of Douglas Adams
    Save us from small screen superheroes

    Save us from small screen superheroes

    Shows like Agents of S.H.I.E.L.D are little more than marketing tools
    Reach for the skies

    Reach for the skies

    From pools to football pitches, rooftop living is looking up
    These are the 12 best hotel spas in the UK

    12 best hotel spas in the UK

    Some hotels go all out on facilities; others stand out for the sheer quality of treatments