Post Office Guaranteed Equity Bond

coralie_2

Hi,

I am thinking of investing £1000 in a Post Office Guaranteed Equity Bond. Do you think it’s worth it and is the Post Office the best provider?

Does anyone have any views?

Thanks for any responses.

Tim_L

Guaranteed equity bonds are VERY poor investments indeed, definitely wolves in sheeps' clothing.

They look superficially very attractive for the risk averse, but on a closer look they don't stack up.

1) In the worst case where there is no increase in the indexes involved, assuming a 5 year term, you lose a sum equal to about 25% of your capital, which is what you could have gained just leaving the cash in the best yielding savings accounts and compounding. These investments are therefore not zero risk by any means.

2) You have no control of the timing of an exit because these products are rigidly fixed term. If you get two years of strong growth and a 3 year decline, you don't get any gains and there is virtually nothing you can do to lock in profits.

3) Growth is usually capped. I'm not sure what the PO bonds are, but this usually means the bonds are not significantly more attractive than holding cash. In your case, assuming 5% is available for cash savings, and the cap rate is 10% (for the sake of argument), you are risking £250ish to gain a maximum of £250ish because this is the difference between the amount of interest you would get on the cash over 5 years and the maximum potential return from the GEB. This is an even money bet you have to wait 5 years to win (or lose), and frankly you might as well stick £250 on black in a casino and get it over with immediately. And bear in mind that this is a cap, not a guarantee, so the actual returns could actually be much less, even if you win the bet.

4) You don't get share dividends rolled into returns, which is a quite significant part of profits from other stocks and shares investments.

GEBs combine the worst aspects of fixed term investments and stocks and shares investments, and are unashamedly marketed at the financially naive as a one way bet: they are not. The downside risk is pretty large in proportion to the potential gain, and the upside is limited. It is frankly scandalous that organisations such as the Post Office are using their good name as a public service organisation to sucker people into taking these products on.

There are also much less risky forms of investments than anything to do with stocks and shares. For some reason, people seem to believe that their only options are cash or something based on stocks and shares, but there are plenty of options in between. IFAs will explain some of these to you.

dunstonh

http://forums.moneysavingexpert.com/showthread.html?t=194188