Protected FTSE Plan and Guaranteed Equity bonds - are they same thing?

ukdutypaid

Wow guys that's my head thoroughly done in..
I've been looking at these types of products. Complete newbie to them, but want to slightly up my level of possible return, above and beyond that which might be available from Cash ISA's/Savings..
Thought the GEB type of thing might be a good idea.
Yes okay 3% over 3/5 years I agree isn't so good.
I've seen an HSBC one that's Base +1, on 50% that's almost as good as some of the ISA's and 50% of the return (yes don't fully understand that bit yet) on the other 50%.
Yes you lose the divi's but, isn't Medic right there. That's the price one pays for reducing the risk?
Gulp though now.....
whambamboo's post I'm still dealing with (not 'cos it's wrong or anything, just so hardcore. Not going to deny that I may be totally taken in by the gaurantee's and the 100%+ of the returns etc!)

GEB's simply not very good then I take it.... HSBC one?
http://www.hsbc.co.uk/1/2/personal/savings-investments/guaranteed-capital-account/
Plus it can be put into an ISA also.
For somebody not ready for out and out share dealing, or even a Tracker fund (with/in/out of an ISA) are these things really such a bad idea?
Or is Jamesd's approach actually the best one? Hell could you ISA that even?

cheerfulcat

ukdutypaid wrote: »

I've been looking at these types of products. Complete newbie to them, but want to slightly up my level of possible return, above and beyond that which might be available from Cash ISA's/Savings..
Thought the GEB type of thing might be a good idea.

If you want better returns than cash, go for equities.

Yes you lose the divi's but, isn't Medic right there. That's the price one pays for reducing the risk?

No, he's wrong. You haven't reduced risk because the risk was never there - GEBs are largely cash deposit accounts, there is absolutely no exposure to the stock market on your part. Even the provider doesn't really have direct exposure as they cover the equity part by buying derivatives. All you are really doing with these things is swapping a known interest rate for an unknown one. Then there's the tax implication - all of the interest is paid at the end, and you are taxed on it as interest. With a proper stock market investment a good bit of any gain is covered by the CGT exemption ( so no tax to pay ) and a basic rate taxpayer has no further tax to pay on dividends.

whambamboo's post I'm still dealing with (not 'cos it's wrong or anything, just so hardcore. Not going to deny that I may be totally taken in by the gaurantee's and the 100%+ of the returns etc!)

Yep, taken in as planned by the industry.

For somebody not ready for out and out share dealing, or even a Tracker fund (with/in/out of an ISA) are these things really such a bad idea?

They're a rotten idea. You don't have to plunge straight into direct shareholding, there are plenty of unit trusts and investment trusts to choose from.

Or is Jamesd's approach actually the best one? Hell could you ISA that even?

It's a straightforward portfolio approach. Decide how much you want to allocate to riskier assets and keep the rest in cash or index linked gilts. An alternative would be to use derivatives as the banks do for the GEBs but that takes a little more knowledge.

jamesd

ukdutypaid, what I suggested is a fair approach if you really need the guarantee that you will get back your original capital, losing no more than inflation. It has the merit of clearly beating the commercial packaged GEB products, which is why I used it. It's not really the best approach overall if you can accept some risk of a drop in value short term that will recover if given a few years more in the investment.

To see what I think is really best, do a search on "sector allocation" and "asset allocation". Those let you pick a selection of funds that match your desired level of risk and will almost certainly beat the GEB or DIY GEB approach. But this doesn't guarantee return of capital if you happen to need to take the money out during a time when it's down rather than up.

whambamboo

ukdutypaid wrote: »

Wow guys that's my head thoroughly done in..
I've been looking at these types of products. Complete newbie to them, but want to slightly up my level of possible return, above and beyond that which might be available from Cash ISA's/Savings..
Thought the GEB type of thing might be a good idea.
Yes okay 3% over 3/5 years I agree isn't so good.
I've seen an HSBC one that's Base +1, on 50% that's almost as good as some of the ISA's and 50% of the return (yes don't fully understand that bit yet) on the other 50%.
Yes you lose the divi's but, isn't Medic right there. That's the price one pays for reducing the risk?
Gulp though now.....
whambamboo's post I'm still dealing with (not 'cos it's wrong or anything, just so hardcore. Not going to deny that I may be totally taken in by the gaurantee's and the 100%+ of the returns etc!)

GEB's simply not very good then I take it.... HSBC one?
http://www.hsbc.co.uk/1/2/personal/savings-investments/guaranteed-capital-account/
Plus it can be put into an ISA also.
For somebody not ready for out and out share dealing, or even a Tracker fund (with/in/out of an ISA) are these things really such a bad idea?
Or is Jamesd's approach actually the best one? Hell could you ISA that even?

HSBC explain fairly clearly (their product marketing is a lot more honest than the one medicman has been diddled by) what's wrong with their product.

The capital repayment and growth potential that the Capital Growth Fifty
offers have to be provided at a cost and that cost is that your returns may be lower than direct investment in stocks and shares. Stock market indices measure share prices on capital values only, so the Capital Growth Fifty will not pay out income or be eligible for any dividends from individual companies in an index. However, the Capital Growth Fifty aims to protect you against falls in the stockmarket at maturity, whereas with direct investments in stocks and shares, you would be exposed to such falls.

In other words, you are PAYING for a capital gurantee. But looking at history, the chance of an absolue fall in the FTSE 100 over 3.5 years is slim. So you are paying for something that has little value IMO - you've sacrificed 3% yield for something which is almost worthless.

And of course you've all your eggs in the one basket with the FTSE 100, which is a risky thing to do.

The other thing about these products is that they are not stockmarket investments, and *all* growth is treated as income. This is a bit of a waste of your capital gains allowance, which allows you to make £8,800 (an amount that rises each year) per year (and more for your spouse) without paying a penny in tax. The equity bonds OTOH, on £8,800 interest would attract £1760 in tax for basic, and £3,520 for higher rate tax payers - a nasty slice out of your profits.

On top of that, the capital gains allowance has taper relief, starting at 5% for assets held for 3 years, and increasing by 5% every year. So whereas with the GEB you're certainly going to be paying tax (unless in an ISA), you probably won't have to worry about capital gains tax until your portfolio is fairly large (of course dividends are taxable as income, but you don't get them inside the GEB anyway).

Not sure why you're not ready for a Tracker? They aren't ideal, but it can't be that hard to buy something like this (http://www.legalandgeneral.com/investments/isas/index-tracking-isa/index.html) can it?

ukdutypaid

Thanks guys.
I take the point that one is paying hefty costs for the magic "guarantee" word.

Interestingly the Nationwide one is 10% over 5 years. Min investment of 5k, 65% of returns, but across the FTSE, DOW and Nikkie..
http://www.nationwide.co.uk/investments/guaranteed-equity-bond/default.htm
(don't worry I'm not going to run through the whole market. I think there will be more postings about these things though.
Worthy of a Martin attack and some name checks from in here perhaps?)

Feel slightly chastised for not having sufficient (a sufficient number of, big enough?) balls, for even a Tracker within an ISA....
I'll put me short trousers back on and perhaps work up some bottle... lol

I think what I'm getting most out of this is the realisation that ones funds in equities would have to suffer a catastrophic collapse in order to take a loss.
That's why they the adverts hook you on these things.... One just craps oneself.
I mean who the hell wants to take the risk of losing 1.5K/3K, 5 for Nationwide....
So one just leaps onto that magic word...

jamesd

ukdutypaid, one fund is a bad idea anyway. What you'd probably find more interesting is something like a four way split into:

corporate bonds
commercial property (real properties, not property equities)
UK absolute return fund (tries hard to see no loss)
multi-manager global growth

Those are in increasing risk order. The global growth will provide most of the growth potential and the other three should just perform pretty steadily and protect your capital pretty well.

Absolute return funds are a bit new and hard to predict and the alternative would be UK equity income.

By the end of a six year period you'll probably have seen something like 5-7% a year - 34-50% total - on the first two, a bit more and a fair bit more on the absolute or equity income funds and maybe 10-15% a year - 77-131% total - on the global growth. To get you down below where you started would take losing around 50% of the likely value at the end and that's pretty unlikely. Not impossible, but you can reduce the chance of that by evening out the percentage splits once a year, so the growth from the higher potential ones gets put into the more stable ones. Or vice-versa if the market falls and it becomes cheap to buy more of them.

You would see the portions going up and down a bit year on year - particularly the global growth bit. By the time you're three years into a six year term it'll be pretty unlikely that those swings take you below where you started.

This isn't a very cautious mixture but the numbers should show you why it's pretty unlikely that you'll fail to get back at least as much as you put in.

EdInvestor

Try reading a bit about "asset allocation" and how this is used to manage risk.

Info and a calculator here

whambamboo

ukdutypaid wrote: »

Thanks guys.
I take the point that one is paying hefty costs for the magic "guarantee" word.

Interestingly the Nationwide one is 10% over 5 years. Min investment of 5k, 65% of returns, but across the FTSE, DOW and Nikkie..
http://www.nationwide.co.uk/investments/guaranteed-equity-bond/default.htm
(don't worry I'm not going to run through the whole market. I think there will be more postings about these things though.
Worthy of a Martin attack and some name checks from in here perhaps?)

This doesn't seem very interesting to me. You only get 65% of the growth? And no dividends either? AND you lose half the last year's returns through final year averaging.

For the 7% growth + 3% yield example, you'd get 61% growth over 5 years on the market. But with the Nationwide, losing the dividends and 35% of the growth you'd only get 23% growth. That's less than half!

Sacrificing 35% of any gains AND your dividends is a MASSIVE price to pay.

I don't see that this product is likely to outperform a savings account. You'd get 31% in a 5.5% savings account.

These products have been slated on these forums numerous times.

Unfortunately Martin doesn't appear to have grasped what a con they are, describing a Post Office 125% product, laughably, as 'a cracker'

http://www.moneysavingexpert.com/cgi-bin/viewnews.cgi?newsid1115805361,4479,

He doesn't properly explain how you're losing half your last year's return, and doesn't really make it clear how bad the tax treatment of them is, meaning that you're probably losing 20%-40% of you return, with no CGT allowance to use.

ukdutypaid

Guys, seriously I'd like to thank you all. I obviously don't get the maths at all....
Going to have to read this lot again several times.......

Back to CC's, CA's, Cash ISA's and Savings accounts for me I think, or with the kids in school.........

These things are obviously a nightmare...
I simply don't get how any fall in shares in year one, don't have to be made up with the same rise in year two +1%, in order to make any gains at all...

I'll try and do some workings out... Sorry.

You can't legislate for stupidity, I'm afraid, it's as simple as that...

dunstonh

Back to CC's, CA's, Cash ISA's and Savings accounts for me I think, or with the kids in school.........

Dont give up the thought of investing. There are some very good investments out there and you can always take it in stages by dipping your toe in the water. You dont have to dive in at the deep end either. Investing is about scales of risk and reward and there are plenty of investments at the lower end of the scale.