Post Office GEB

cheerfulcat

Not at all. If you had invested in a FTSE 100 tracker five years ago you would be sitting on a modest 10% profit, thanks in part to reinvested dividends. It is quite clear that some do not understand the importance of dividends; the reinvestment of income has historically provided the bulk of returns on stock market investments .

for people looking for low risk exposure to the stock market, this may be a useful product

I keep seeing this claim of low risk; losing money at the rate of inflation is not low risk by any stretch of the imagination. £1000 put into a GEB five years ago would now be worth £863 in real terms; the money in the tracker would be worth £949.

dunstonh

moneysavingobsessive wrote:

I agree with Martins comments. The capital guarantee in these bonds is useful - it appears that most people assume that stockmarkets will rise, don't forget that there are crashes too. If you had bought a GEB before the tech bubble, you would have got your capital back (I know that this is less in real terms, but may not be too affected depending upon personal inflation - ignore RPI as its not personally representative), whereas if you had direct exposure or through a tracker etc, you would have lost in nominal and real terms.

Furthermore, there is decent potential upside if markets rise, OK it ignores dividends, but for people looking for low risk exposure to the stock market, this may be a useful product.

Had you bought a tracker in any of the FTSE indexes (which these GEBs follow), then you would not only got your money back but would also be in surplus on the unit value, let alone the dividends. The GEBs would only return your capital.

Therefore you are incorrect in your assumption that the trackers would have lost money in the timescale you mention.

Failing to take inflation into consideration is a mistake.

moneysavingobsessive

I didn't mean holding the tracker to date - more a short term thing. Some of these bonds are only a year, or two/three years. Therefore if you had bought a years GEB just before the stock market tech bubble, at the end of the year, you would have been better off than if you had bought a tracker.

Also, on the value of inflation, it depends what inflation measure you are using. If CPI, at approx 2% then this is £20 a year per £1000, not a huge amount, although of course should be taken into account.

I agree that in the longterm you would expect markets to rise and reinvested dividends to make up a significant portion of the pot. In the short term however, volatility in the markets may be more important, in which case, GEBs can offer some kind of hedge against a market downturn with the obvious cost of a lower return than direct exposure if the market rises.

I'm not strongly advocating GEBs, just think that in certain circumstances that they can play a part in a portfolio.

dunstonh

I didn't mean holding the tracker to date - more a short term thing. Some of these bonds are only a year, or two/three years. Therefore if you had bought a years GEB just before the stock market tech bubble, at the end of the year, you would have been better off than if you had bought a tracker.

I am not aware of any GEBS which are available for just 1, 2 or 3 years. I think you are mistaking GEBs for fixed rate deposits.

GEBs themselves are a terrible investment for someone who may need access in the 5-6 year term.

GEBs can offer some kind of hedge against a market downturn with the obvious cost of a lower return than direct exposure if the market rises.

Anyone who has got that train of thought would indicate they know something about investing and would know better than to use a GEB for that purpose. They would be more inclined to use corporate bonds, fixed interest or commercial property as their lower risk funds to offset the higher risk.

There has only been one GEB that I was happy with and I last formally recommended one around 1995/1996. That was an income version that paid out 6% in year 1, increasing annully until 10% in year 5 with return of capital at the end. This was done on the life fund tax wrapper making it very good value for basic rate tax payers. In year one it didnt seem that attractive as interest rates were on par. However, it was certainly attractive in the later years. You just don't get them like that nowadays.

cheerfulcat

I'm not strongly advocating GEBs, just think that in certain circumstances that they can play a part in a portfolio.

Nope. Someone who actually has a portfolio most certainly wouldn't put money into a GEB; as dh says, there are far better ways to diversify.

MSE_Martin

dunstonh, first of all you are looking at past rate scenarios - that isn't the point. We all know you can't predict what will happen. What you can do is look at the outcomes in most point of views.

Whereas a 100% return GEB will outperform a tracker when the market drops over 5 years and underperform when it rises, an uncapped 125% return tracker - which we've seen in a number of scenarios will outperform if the market drops, underperform if the market rises slightly and overperform if there is good growth.

For me the low downside risk (ie only lost interest opportunity cost) is a very good one for most new investors. The fact teh concept is simple too and a basic investment is great - im a fan of these products (the good ones of course)

martin

cheerfulcat

Martin, I don't understand how you can ignore the inflation risk. And for you of all people to fall for the flannel of the financial services industry - words fail me.

TBH,and with the greatest respect, I think that it would be much more helpful in the long term to direct people who are interested in a better return on their money to self education and proper stock market investments.

EdInvestor

I'm not sure why people are using a tracker as a comparative investment for the GEB.

Trackers are quite a high risk way of investing in shares.

Much more low-risk stockmarket investments can be found for the more risk averse investor - virtually any Equity Income fund would have trounced both trackers and GEBs over the crash period in the past five years.

Fund list: + 40% over 5 years, including the crash period

And you also have to add in the dividend yield of course - as high as 4% or more income every year (and it's tax free if you're on basic rate ).

These funds contain "defensive" shares - the ones that go up in crashes, because people still have to buy their products or use their services even if there's a recession.

Much better and less risky than both trackers and GEBs IMHO.

MSE_Martin

cheerful cat, i dont ignore the inflation risk. Of course, that's the opportunity cost element i mention. I prefer to keep this in simple terms, as the article states, if you put money in a savings account you'd be better off in a market downturn and worse off in an upturn. You could of course count this as the inflation risk.

As for "who are interested in a better return on their money to self education and proper stock market investments" this is quite rightly a laudable sentiment. Yet let's be realistic here. When it comes to investing the vast majority of people will simply never do this, they're scared of their bank statement never mind investing.

So we have to look for easier options.

Much as I talk about tarts and stable relationships in credit cards (ie the right way is to tart, the easy way to stable relationship) i think there's similar logic here. One of the main advantages of GEBS (the higher percentage ones) is conceptually they are easy for people to understand the risks.

martin

dunstonh

I really do hear what you are saying but I disagree on the tracking.

Past performance is no guide to future returns but we have the advantage of a major stockmarket crash occuring int the last 5 years. The index is down on it's high point. That indicates the scenario that the typical GEB investor wants to avoid.

Lets pick a 5 year GEB for example that tracks the FTSE100 and compare it to the 3 main trackers in unit trust funds. Lets put £5000 in and do it in January 2001.

A 100% GEB would pay back £5000
A 125% GEB would pay back £5000
A FTSE100 tracker would pay back £5112
A FTSE250 tracker would pay back £9977
A FTSE All share tracker would pay back £5549

edit: to allow for a couple of lower risk sectors than trackers

A equity income fund would pay back around £7424
an equity and bond income fund would pay back around £6897
UK gilt £6288
Corporate bond £7029
Other bond £7160
Comm Property £8299

So, we have the scenario where someone wants to make money on the stockmarket but doesnt want to risk their capital in case there is a crash. Well, we just had a crash and look who comes off worse?

Modern trackers do not just follow the index. They get income distributions as well.

We typically rate these investment GEBs at 4/5 on a 1 -10 risk scale. Whereas a tracker would be 6/7. So there is a difference. However, 4/5 does not indicate risk free and there are other asset classes in the 4/5 range which could be used to better effect.

virtually any equity income fund would have trounced both trackers and GEBs over the crash period in the past five years.

Really? 250 trackers have trounced over equity Income. In the previous 5 years to that 100 trackers trounced over equity income. Using your risk comments though, equity income funds tend to come out around 5/6 making them lower risk than the typical tracker.

I'm not sure why people are using a tracker as a comparative investment for the GEB.

Just to compare two things that track the index.

I just feel that the marketing men for these products get away creating a product that people assume is nil risk but in reality is on par with corporate bonds/gilts/fixed interest/commercial property. The lack of dividends/income within the product makes a difference.

The "safety" element is there to comfort someone not wanting to lose capital. However, they are getting that safety at a cost. Many are not aware of that cost. If they were made aware of it and then still choose to go into one, at least they have done it with their eyes open. It's the way that cost of the safety net is hidden that I really dislike.