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
Saturday 27 June 2009
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 fool.co.uk. "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 moneynet.co.uk. "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 www.fscs.org.uk.
If you save money or invest through foreign-owned companies, you may first have to claim from an overseas compensation scheme.
Crowd-to-let: How crowdfunding sites can give investors a slice of the property market for £500
After the election: What will Britain's financial future look like on 8 May?
General Election 2015: How you vote next week could affect your finances
Beware credit card firms’ odious tricks
Five Questions On: GB Energy's new tariff
- 1 If I were Prime Minister: I'd give tax cuts to the rich, keep Trident, and get my football team wrong
- 2 Italian police 'reveal' what Jesus looked like as a young boy
- 3 General Election 2015: 14-year-old boy asks Nick Clegg – 'can you kill Katie Hopkins?'
- 4 University student in court for allegedly covering housemates' food in window cleaner and spit
- 5 Ryan Gosling posts tribute to 'Ryan Gosling Won't Eat His Cereal' creator Ryan McHenry
In defence of liberal democracy
Over 50,000 families shipped out of London boroughs in the past three years due to welfare cuts and soaring rents
EU asylum policy is 'a direct threat to our civilisation', says Nigel Farage
The Rothschild Libel: Why has it taken 200 years for an anti-Semitic slur that emerged from the Battle of Waterloo to be dismissed?
General Election 2015: UK will be 'run for the wealthy and powerful' if Tories retain power, Labour warns
General election live: SNP suspends two members for disrupting Labour rally
iJobs Money & Business
£20000 - £25000 per annum + Uncapped commission: SThree: Can you speak German,...
£25000 - £30000 per annum + benefits: Ashdown Group: An exciting opportunity f...
£215 per day: Ashdown Group: Junior Project Manager (website, web application ...
£40-50K: Guru Careers: We are seeking an experienced Software Engineer / Softw...
Day In a Page
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings