GEB's I'm confused!

Hi

Guaranteed Equity Bonds are a very poor investment. You are tying up your capital for 5 - 6 years with absolutely no guarantee of any return. Yes, you are promised a percentage ( very rarely 100% ) of the rise in whatever index/indices the "bond" is tied to. But this is misleading; the final level is almost always taken as an average of the last 6 or 12 months, which means that if there is a dramatic rise in the last month you will not have the full benefit of it.

You also miss out on any dividend - the FTSE 100 returns roughly 3%.

Based on a 30% stock market rise you appear to get 3k return on 10k invested over 6 years (?) 13k total after 6 years....Is my thinking correct that I would earn more in ING over the same period or am I missing something?

You would get 3k provided that the market had risen by 30% taking into account the average level over the final 6-12 months; if it just rose by 30% in the final month you wouldn't.

3. Historically, has the market risen by more than 30% in a 6 year period ? (this seems like a big % rise to me, but I've NEVER invested in stocks before)

The average annual return is 7%ish, but this is with dividends reinvested. 30% over 6 years implies 4.5% annually and is probably only an illustration. But really annual returns are sort of meaningless here. Over such a short time period, anything could happen!

These products are frankly cr*p and I am surprised that Martin recommends them. With the sort of money that you are talking about, you would be better off reading a few good books on investment and taking charge yourself, if only to the extent of buying a tracker fund with some of the money and putting the rest on deposit. Have a look at the Motley Fool -

http://www.fool.co.uk/help/sitemap.htm

In particular, this bit -

http://www.fool.co.uk/lrninvnov/lumpsum.htm?ref=sitemap

HTH

Cheerfulcat

They are not crap. They have their place for the right person. That is the important thing to remember.

Oh yes they are cr*p :-). Think about it - you are losing money if all you get is your original investment back; over 6 years at 3% inflation a person who invested £10000 gets back the equivalent of ~£8300. There can be *no one* for whom this product is right. The cautious investor is taking more of a risk than he or she realises, and the more adventurous one is getting paid less than the market would pay for the risk he or she is willing to take. These products are created purely and simply to make money for the issuing bank, and they are IMHO cynically playing on people's natural sense of fear and greed.

Edit: If you really wanted this sort of structure, that is, your original deposit back after 5-6 years plus a bit of the stock market action, I'm sure that it would not be too difficult to design a DIY version using a deposit account, the notional interest thereon and a few fancy bets...

Cheerfulcat

slater14 wrote:

Thanks for all of that everybody,

Dunstonh,

I should probably elaborate a little - I'm 37 and I have no need for the money at the moment. I feel house prices have peaked and will slip back by at least 15% in the coming years. What I want to do is beat the 5% ING give me but not "play the stock market", as I said its not something I've ever done.

You are right - I want capital security (maybe a small capped risk, but nothing more).

The 5 - 6 year timescale is when I intend to buy property again.

So in summary I want -

1. 5-6 year tie in (maximum)
2. To beat ING interest rates
3. Capital security (would sacrifice interest as long as capital wasnt eroded)

Any ideas?

Hi, Slater,

What I was trying to say in my reply to dunstonh is that it would be possible for you to risk your interest ( since you are willing to do that with the GEB ) by putting *it* ( rather than the capital ) into the stock market. So you could put the capital into a fixed term, fixed interest account, take monthly interest and put some or all of that into an index tracker, an equity income unit trust or an ETF ( a cheaper tracker ).

You could get more complicated and put, say, £200,000 into an account paying a fixed 5% for 5 years ( these numbers are all notional btw ). Knowing that you will receive ~ £40,000 ( or adjust if you are a higher rate taxpayer ), you can use £40,000 of the remaining capital *now* to put into a stock market linked unit trust or ETF ( or even, as Editor suggests, a high yield portfolio ). Hey presto - risk free investing ( inflation risk excepted ). This is fairly close to what the GEBs do, from what I can tell, only they use derivatives. Having said all that, a 5 - 6 year time frame is far too small for equity investing IMHO; it would be more of a gamble than an investment strategy.

dunstonh,

So getting your money back assumes no stockmarket growth or a drop. Someone in a UK tracker/equity fund is likely to be in deficit if that is the case. Someone investing £10k in L&G tracker fund 5 years ago would now have £9204 with distributions re-invested. Then take the inflation off and its worse than the £8300 you mention.

But you are overlooking the fact that someone bullish of equities ( and they must have been, or they wouldn't have invested in a tracker ) could well have bought more as the prices decreased (vide Buffet's " hamburger law " ). In which case they would now be well in profit. Note too that this option is not open to the GEB holder.

The other point is that the investor in the tracker/equity fund has a choice about the term of the investment. Knowing that over the long term equities outperform cash or fixed interest, he or she can just hold on until things improve. The unfortunate sap who "invests" in a GEB has no choice - if the index is down at the end of the term, that's just too bad.

The worst thing is the illusion of safety given by the worthless " guarantee " of the initial investment being returned. It is *not* the initial investment by any stretch of the imagination. Savers and investors ignore inflation at their peril. GEBs are not risk free.

Cheerfulcat