Official Beat Stockmarket Returns at No Risk / MoneySavingExpert.com discussion area

Former_MSE_Dan

This discussion relates to the Beat Stockmarket Returns at No Risk article, now updated to include the new Post Office GEB.

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dunstonh

or the "potentially beat stockmarket returns at no risk" as those of us authorised would have to say (as there will always be stockmarket funds that beat GEBs).

Anyway, given the recent increase of threads enquiring about GEBs, I suppose it's about time we had a another thread for all the regulars can say how poor value these are.

carnet

It'll be getting a wide body-swerve from me.

The FTSE100 is just too restrictive and top-heavy. Also, don't like the idea of being tied into these things for a set number of years.

Might appeal to "widows and orphans" wishing to dip their toe in..

I too think that the heading of this thread is completely misleading and erroneous - there are a helluva lot more ways to "Beat Stockmarket Returns" than merely investing in the FTSE-100.

Or, more precisely, ways of beating the FTSE-100 returns .

System

What are GEB's?:o

carnet

Judi wrote:

What are GEB's?:o

Guaranteed Equity Bonds

deemy2004

The 'profit' is liable to income tax rather than capital gains tax.

Hence why pay 40% when you can pay zero by purchasing FTSE ishares.

dunstonh

The 'profit' is liable to income tax rather than capital gains tax.

Or get a version in the ISA wrapper or use on in the life fund wrapper. Or better still, don't get one and do the job properly.

ffacoffipawb

deemy2004 wrote:

The 'profit' is liable to income tax rather than capital gains tax.

Hence why pay 40% when you can pay zero by purchasing FTSE ishares.

And in the latter case, receive the dividends on top.

cheerfulcat

And of course " no risk " is not correct as, if only your original investment is returned at the end, it will have suffered the ravages of inflation...

koru

deemy2004 wrote:

The 'profit' is liable to income tax rather than capital gains tax.

Hence why pay 40% when you can pay zero by purchasing FTSE ishares.

That will only work for the first £8k of gains per year, of course. Anyone with a big chunk to invest will need other options.

Same goes for ISAs - these will improve the advantages of the tracker for the first £7000 anyone has to invest, but not once you have used your allowance.

I think Martin's worked example is pretty useful, though the assumed 1% annual fee on the tracker is way too high. Haven't Fidelity dropped their fees to 0.25% on trackers? If so, then the tracker should earn 2.5% dividend income, minus 0.25% = 2.25% per year. Compounded over 5 years, that is a 11.7% return that you are forgoing if you do a GEB instead. So, how does that affect Martin's example?

If the FTSE falls, you would be better off with a tracker provided it falls by no more than 11.7%. If you are taxable on the dividends (which will depend on whether the tracker is in an ISA or other tax shelter and, if not, on how much other income you have) the figure of 11.7% may be lower, after tax.

And if the FTSE rises, you will still be better off with a tracker, provided that the 25% extra rise from the GEB is less than 11.7%. In other words, the GEB only gives a better gross return if the FTSE rises more than 46.8%. (Again, the 11.7% would be lower, if taxable on dividends. But the gain on the GEB might also have to be reduced by tax, depending on whether the gain incurs income tax, capital gains tax or is tax free. So, there are many permutations.)

So, you would be better off with a tracker UNLESS the FTSE falls by more than 11.7% or rises by more than 47%. Funnily enough, this means that if you buy a GEB you are betting on the FTSE rising by an average 8% per year, so in a way, this is not for the widows and orphans, as it is suitable for someone who thinks the FTSE will rise strongly.

I am not necessarily saying that this means a GEB is a bad choice, but I would imagine that looking back over previous 5 year periods it must be reasonably common that you would have been better off with a tracker. Sure there are periods when the FTSE has grown by more than 8% per year (the last year being an example), but with inflation at 2-3% and GDP growth forecast to be lower than the last few years, 8% average growth seems pretty optimistic.

Anyone got any statistics on FTSE performance in the past? I think it rarely falls over any 5 year period, but how often does it rise more than 47%? (Yes, I know the future may be different from the statistical average, but it gives an idea of probabilities.)

Funny, I started this post intending largely to defend GEBs, but the more I have thought it through, the more I think they are questionable. They sound like conservative investments, but that are actually leveraging your investment, which is what high risk hedge funds do.

EdInvestor

If you are taxable on the dividends (which will depend on whether the tracker is in an ISA or other tax shelter and, if not, on how much other income you have) the figure of 11.7% may be lower, after tax.

Dividends are tax free to basic rate taxpayers, higher rate pay 25%.