Guaranteed Equity Bond

rinoa778

Hello. I currently have my money in savings accounts and I'm prepared to go up a step in the risk ladder with the chance of a better return. GEB seems to be the next step. I'm currently looking at a few now and would like any feedback. I'm thinking of investing £500-£1000.
I know we can't predict the future but I'm sure I will not need that money in the five years. I'm not willing to invest anymore than that because I will need the money so this does restrict some GEB's.
Could anyone give their thoughts on this? :-/

Tim_L

The main problem with GEB's is that you don't get dividends which knocks a fair amount off your growth. Even if you get 100% of the tracked index growth this is a fairly hefty price to pay, and you'll also potentially be losing around 5% a year in terms of the interest you could be getting on instant access cash if the guarantee kicks in (if it doesn't then you're obviously better off with a tracker ISA or similar where you get all the gains). Thus the only benefit of GEBs is where the downside prevails, and even then you lose some money.

Obviously GEBs have some similarities to long term bonds in terms of their extreme inflexibility (no withdrawals at all). The problem here is that if we had a good couple of years followed by a recession, you would have no way of pulling your cash out at the top of the market. Bearing in mind you can guarantee quite high rates now in cash (6.05% for a five year bond according to Moneysupermarket), the question to ask would be if you're investing cautiously over a long term (i.e with a guarantee of capital return), why not just settle for this?

On the other hand, the advantage of a tracker ISA is that to some extent you can choose when to start and when to get out. The danger of course is either a 9/11 style event that knocks the bottom out of one or other of the indexes too fast to deal with, or a long slow decline that you feel may turn up but doesn't. I'm personally in no hurry to put money into equities, as I'm unconvinced the current recovery will be sustained: I work in a company that sells into the worldwide manufacturing industry, and although there has been a marked upturn, it all feels a bit fragile.

However, all this said, GEBs are not unreasonable products to take out if you want to take a punt on a global recovery leading to a boom and can't afford significant losses of your capital.

DiggingOut

Remember that the Guarantee is only as good as the solvency of the Guarantor. So you want to check that out. I think National Savings has one -- that should be secure.

rinoa778

Thanks for your help. I think I'll try fixed rate bonds first before I dabble in something I don't know enough about.