'Stock Market Growth of 25% in perfect safety' discussion area.

supermum1958

I understand all you are saying, but it seems to me that you are all relatively sophisticated investors who are missing the point.

Many of us were scared badly when the markets took a dive a couple of years ago or so. We are uneasily aware that others are making a lot once again on the ol' roller coaster, but we feel unsafe about shares. Yes, of course you pay for the safety of the gravel at the bottom - your money back if the market falls - but it's a safety we are ultimately prepared to pay for.

For me, the more deterring bit is that the bond is taxed as income, not capital gains. I've got four of these and am hoping to bang them into a pension under the new rules when they mature, thus escaping having to actually cough up the tax....

Meanwhile, I think the current bond has to be evaluated on the basis of where you think the market's going. In five years time there'll be another election. How will that affect the market? And is the market currently undervalued, overvalued, or is it about right? Seems to me those are the most important questions.

Tim_L

The point is really that these investments are only any good if you know what the market will be in exactly 5 years time. Even sophisticated investors don't really know this, as you acknowledge. I can be fairly sure given history that equities will probably perform well at some point in the next 10 years, but not at a precise point in time. I can make no argument for taking out a guaranteed equity product that would not lead me to think that a tracker would be a better bet.

Your comments really demonstrate the dangers: people see markets apparently rising and decide they want some of the same, but can't afford to risk their capital. So when someone turns up and says they can do it without risk, it looks like a one way bet.

It isn't.

In effect it becomes a serious gamble. Given Martin's comparison table, the risk over 5 years is about £1500 compounded interest, which you will lose if the bet fails. So you are taking £1500 of your own cash and gambling it.

But you don't know what the return is, so you don't even know the odds you are betting at.

If you don't know what the market is going to do, then this is complete madness. What is the prospect of the markets rising over precisely the next 5 years? 50/50? 40/60? 60/40? If you can't answer this question (and I certainly can't), then you are punting £1500 of your own money into the dark and trusting it to luck. You might as well take £1500 and gamble it on Arsenal winning the Premiership in 5 years time: at least you'd know the odds then.

Just because the £1500 doesn't exist yet because the interest hasn't been earned doesn't mean that you shouldn't worry about losing it. This isn't a small amount of cash, a price worth paying for insurance as supermum suggest, it is over 1/4 of the sum invested that you are losing. Out of which the offering companies are paying their own insurance premiums against a rising market and taking a healthy profit.

The great misrepresentation at the heart of these profits is precisely this: that you can't lose. And what worries me about them most is that the sales pitch used here is squarely aimed at people who don't understand this. It is to say: "look at all these investors making loads of money on equities. Wouldn't you like to do this too, without any risk to your money or having to understand what you're investing in?". Another poster called this sharp practice, and I agree.

If you are confident about the direction of the market and want the chance of higher returns, then take a tracker and watch it carefully in case you are wrong. If you are not, then you can get risk free money equivalent to only about 2% less annually than a reasonable assessment of likely stockmarket growth (7% annually) over a longish term.

If you pile all your money into these products, yes you can make money if you're lucky, but you also risk the loss of a considerable amount of interest, and the interest this can earn you in the future when compounded. Taking a strategy like these products offer is essentially a toin coss against an excellent return or losing an absolutely enormous sum over the long term, when the lost sum could have been compounded many times.

Very few people can take the time to actively manage all of their investments: I certainly don't. Which is why either this is deferred to others via managed funds, or risk is mitigated by mixing a portfolio between low rish cash based products and higher risk investments such as trackers or shares.

dunstonh

For me, the more deterring bit is that the bond is taxed as income, not capital gains. I've got four of these and am hoping to bang them into a pension under the new rules when they mature, thus escaping having to actually cough up the tax....

That does depend on the issuer. These products are available in different tax wrappers so one that isnt taxed as income could be used where appropriate.

4) With profits endowment style policy. These are hardly fashionable, but they do lock in any gains via bonuses and provide fairly risk free exposure to the equities market as well as some life insurance (though not necessarily for you if you buy a second hand one). You do get a guaranteed amount back at the end of the term too, so there is capital protection of a sort.

Not endowment but single premium unitised with profits funds from the big 2 insurers (NU and Pru) are doing very nicely. NU's version can have a 5 year and 10 year guarantee on the capital. I just did an annual review for one I did 2 years ago and its up by over 8% p.a. net. There is still a place for these with the right person and more importantly, the right provider.

5) Additional pension contributions. These are very tax efficient for long term savings, can be lodged in both equities and cash, you will need the money at some point (or else it will pass to your dependants), your pot is not taken into account when calculating benefits if you are made redundant (and is removed from the calculation when working out entitlement to tax credits), and there are some very interesting developments coming next year that may bring additional benefits. The downside, obviously, is that you can't get at the money until you retire, so you need to be clear that you are saving for retirement

Too many people ignore pensions when investing. A pension is just an investment with a certain style of maturity. All the funds that available on an ISA/UT/OEIC are available on a pension. However, people don't seem to realise that and for some reason associate personal pensions with the small number of occupational schemes that have gone bad and where people have lost money.

ie. put £3600 into a stakeholder, which has cost you £2800. Assume 5% a year growth and after 5 years you have £4600. Take 25% tax free and thats £1150 returned to you. The remaining £3450 buys an annuity and at 6.5% that gives £224pa income for the rest of your life. So, your net cost has been £1650 but you are getting £224pa which is 13.5% gross.

Obviously, term of investment and age are the appropriate things here. Also, like any investment the rate of return matters. But if the the goal of the investment matches the product, it should be considered.

As I said, the fact that this sort of product is aimed at the financially unsophisticated does raise a big red flag for me (this is not financial snobbery, just a statement of fact). It's in the same category as 2.5% interest building society accounts in my view, a poor value product flogged mercilessly to consumers because it's profitable for the issuer

The product is geared for a mass sales process and favours bancassurers. People buying their products from banks are generally easy targets for poor products as they know no different. Anyone with a bit of knowledge wouldn't be going to a bank for a regaulated financial services product.

jamesebaker

I think the point is being missed when comparing this GEB to a tracker. You should only be investing in a tracker if you're in it for a minimum of 5 years so you can ride any peaks and (more importantly) troughs in the market. Having a strategy of "getting out when the going is tough" is a very poor investment strategy when investing in the stockmarket. The stockmarket does go up and it does go down and many so called experienced investors trade using a strategy which tries to maximise investments by getting out during the peaks. The problem with this is that you often miss the peaks and end up getting out too late and so causing greater losses.

If you are investing in a tracker, you should be aiming for a minimum period of 5 years which is surprisingly the same period as the GEB. So I see this as a potentially safer way of investing in long term stock market growth. However, you are not eligible for dividends but then again there are many tracker funds where you are not eligible for dividends either.

Also, when the GEB matures, the stock market rise and falls are averaged out over the final 6 months so if there is suddenly a huge decrease on the day of maturity, your investment will not be massively affected, something a tracker cannot guarantee.

Trackers are probably better investments if you are investing in small amounts on a regular basis and in a declining market you can increase your investment for that month and get more for your money. Investing lump sums in trackers can be highly risky as your investment may quickly decline if you are only in it for the short term (which you shouldn't be anyway!).

I think the best thing about this is that you can't touch it for 5 years, and historically the stockmarket has always increased in value over 5 year periods.

If you want to benefit from dividends, then you should be investing in specific shares anyway, but these are not investments you can just jump into or you may get your fingers burned. You should spend a minimum of 6months - 1 year researching companies and watching movements before investing in your first shares.

jamesebaker

It should also be noted that 90% of fund managers underperform the market using a daily market strategy.

Tim_L

Nobody is arguing that the upside isn't roughly equivalent to a tracker over an equivalent period.

The problem is on the downside (which is disasterous) and in the total lack of flexibility. The GEB products don't allow you any flexibility at all, so if the threshold calculation dips just below the threshold at the end point you have lost your bet (whereas with a tracker you could stay in the game), and on the figures Martin put up you are £1500 down. The 6 month averaging (where it exists, and it's not universal) works against you just as easily as it works for you, as a sharp rise at the end would still mean you lose.

The statement that "historically the stockmarket has always increased in value over 5 year periods" simply isn't true. Anyone investing between 1998 and 2003 would have seen a sharp initial rise but have lost money overall. The most you can say is that equities have historically tended to beat other forms of savings returns over the last 80 or so years, but there are some serious caveats caused by the current outflow of capital to India and China which may depress the markets long term. You really can't extrapolate the future from the past, as anyone with an endowment based mortgage has found out. Things change.

EdInvestor

jamesebaker wrote:

If you want to benefit from dividends, then you should be investing in specific shares anyway...

Certainly I agree the DIY approach will make more money - see this example

But you can still get good returns by investing in Equity income funds.These are funds which invest in shares that pay high dividends. They pay you the dividend money to your bank account every year - like bank interest - and it's tax free to basic rate taxpayers (25% for HRTs).If you look at the link, you'll see the Yield column, which tells you how much divi each fund pays.

The most popular Equity Income funds are the two Invesco Perpetual ones, Nos 43 and 44. See their performance over 5 years? And you get the income as well! Can't be bad

If you want them to reinvest the divi money rather than pay it out to you, pick a fund marked "Acc" for accumulation rather than "Inc" for income.

It's sensible to put your fund in an ISA and even more sensible to set up the ISA at a discount broker like Cavendish or Hargreaves Lansdown who will rebate the initial charges on the funds to you.

Equity income funds have a much better performance record than index trackers because the fund manager picks the shares that pay the higher divis - it's quite logical when you think about it.Almost all the gains on shares over long periods come from the dividends.

jamesebaker

Another thing that hasn't been mentioned are the charges on trackers.

Initial entry charge
Annual Charge
and exit charge.

I know many don't charge entry and exit fees but all charge annual fees and it seems that the ones who charge the least in annual charges have the highest error rate (something which should be avoided in a tracker fund).

dunstonh

jamesebaker wrote:

Another thing that hasn't been mentioned are the charges on trackers.

Initial entry charge
Annual Charge
and exit charge.

I know many don't charge entry and exit fees but all charge annual fees and it seems that the ones who charge the least in annual charges have the highest error rate (something which should be avoided in a tracker fund).

The vast majority do not have an exit charge. They can be purchased easily enough with no initial charge and the annual management charge is often very low, around the 0.5-1%.

Do not fall into the trap of believing there are no charges on a GEB. They may not be explicit but the provider is making a profit on these.

EdInvestor

dunstonh wrote:

Do not fall into the trap of believing there are no charges on a GEB. They may not be explicit but the provider is making a profit on these.

Quite right. About time the FSA included them in its comparative tables, as they're quite popular.

http://www.fsa.gov.uk/tables

I had a look at tracker charges based on 4k in an ISA over 5 years, and there's a surprisingly large variation for what should be a very cheap plain vanilla simple investment product.

The range is from M&G at 139 pounds through to a number of providers at over 500 pounds. So it's always worth checking. More than 500 pounds is outrageous for a tracker IMHO, you don't pay much more for the best performing managed funds like Fidelity Special Situations.

And don't forget to go through a discount broker to get the charges rebated.