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FINANCE |
| Guarantees and Capital Protection Investments
– It pays to read the small print. It has been an extremely turbulent time in
the stock markets over the last few years, but with interest rates at historically low
levels, investors looking for a reasonable rate of return have found themselves in a
dilemma. The answer adopted by about a quarter of a million people has been to put
an element of their savings into stock-market linked bonds. These products have given some
exposure to the stock market (usually with a participation rate in the growth of an index
such as the FTSE100), while promising a degree of capital protection. This has proved
popular with some £5 billion being attracted to these products. Unfortunately however,
these bonds can be inherently complex and investors need to look at beyond the rate given
to make sure of what dangers are lurking in the small print. There tend to be two
types of these bonds, those that offer higher fixed levels of income or growth, but with a
risk of losing some capital, and those with potentially lower returns but more by way of
capital security. Given the marketing, it is easy to see why so many of the CAPITAL
AT RISK products were sold, especially with the tantalising promotion of high income (some
with double digit annual “income” ) or alternatively substantial capital growth.
These higher returns were set at the outset and implied a low or even no-risk approach for
the investor. The truth of course is that a high level of return is just not possible risk
free and so higher returns would normally equate to higher risk. The risk was that
the client was linking capital return to one or another index as mentioned above and at
the end of the investment period if the index or indexes failed to reach a appropriate
level then the investor lost some or in the worse case all of their capital. The
length of term of any plan is an important issue and should also be taken into account
when considering any investment. As a general investment consideration, the longer any
investment is held the less chance there would be a loss, but most of the plans on offer
have fixed terms of commonly 3 or 5 years, after which they mature. Over shorter terms
stock markets can be very volatile and leave shorter terms leave little time for recovery
if a downturn does arise. This is one of the reasons why so many people have lost capital
at maturity through investing in these types of plans. A lot of the investment products
that are currently maturing were launched at or near market highs. In hindsight market
timing could not have been worse. However it has to be remembered that some of these
contracts have been paying income to the investor at rates as high as 10% per annum (i.e.
more than double bank or building society rates) so if capital return at maturity and
income paid are added together returns have not looked so bad. Notwithstanding this most
people do not expect to get back less than they started and so it is easy to understand
why the Financial Services Authority has labelled many plans as being “precipice
bonds”! In the late 1990’s no one could have foreseen what was about to
happen to world stockmarkets and few products at that time offered significant protection
against falling stockmarkets. Products now available offer much more protection than
previously, but can be complex and need to be fully understood before any investment is
made. They can still be a useful investment to include in a wider investment portfolio but
potential investors would be well advised to speak to an independent financial adviser
before committing to investment. It generally costs nothing to speak to an independent
financial adviser and they can steer you towards savings arrangement most suitable to your
own investment needs. For further advice on these or any other type of investments
please contact Pam Blyth at financial futures ifa Ltd on 01263 825037. financial
futures ifa limited is authorised and regulated by the Financial Services Authority. |
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| COFFEE MORNING
on Saturday, 27th November
10.00-12.00 o'clock
at the MORLEY CLUB.
BRING AND BUY, PRODUCE, RAFFLE, CHRISTMAS STALL,BOOKS AND GAME
All proceeds in aid of cancer research |
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