There's no such thing as a guarantee in investments

Published on Friday 6 February 2009 20:20

A THEME has emerged in the past two weeks that tells me that, as far as markets are concerned, the worst may soon be over.

This claim has been made quite frequently of late: optimistic pundits have pointed to the fact that markets are two or three quarters ahead of the economy in bouncing back, the slowdown in the decline in house prices and an apparent but very slight thaw in credit markets, among other indicators. I suspect at least some or all of that is wishful thinking.

Instead, my suspicions arise from a flurry of guaranteed investment product launches in recent weeks that apparently offer the best of both worlds to nervous investors.

As the last bear market ended, I was working on a financial trade paper and reporting on such products virtually every day. They preyed on the uncertainty of investors, promising a degree of investment growth while guaranteeing the security of the original investment. The typical guaranteed (or structured) product has a three or five-year term with returns linked to an index or indices over the period. The security angle is usually that, whatever markets do, investors get their money back at the end.

Little has changed, although some such products now offer more growth and flexibility. The promise of growth potential and security is alluring at a time when markets are volatile and base rates have decimated the returns available on cash deposits.

But the flaws are too numerous for comfort. For example, few of them pay income, inflation means that if markets fall, the return of the original investment is a loss in real terms, and many are too complex even for advisers to understand, let alone the risk-conscious investor.

One plan promoted by what used to be one of Scotland's great banks has sold like hot cakes in recent months, but it's a classic example of what's wrong with guaranteed products. It looks good on the surface, offering stock market participation with a capital guarantee at the end of the five-year term. Except that, when market falls reduce your fund to 80 per cent of its value, it switches you into cash – and keeps you there. So if markets rebound, you won't benefit. Instead you just wait to get your money back at the end, free from growth.

Some guaranteed plans are better than others, but before you succumb to the promise of risk-free investing, here are two truisms to consider. If it sounds too good to be true, it probably is. And if you don't understand it, don't invest in it.

IT'S been a gruelling year and I suspect some were close to throwing in the towel well before the bitter end. But, finally, the 2008 Scotsman IFA of the Year competition is over.

At the outset a year ago, no-one could foresee the unprecedented chaos that was to follow. By October, most financial advisers were fielding panicked calls from clients worried not only about the value of their investments, but about the security of the banks holding their cash.

To their credit, every competitor was able to minimise the impact of the market volatility and while they all recorded losses, they outperformed the market. In doing so, they demonstrated the value of financial advice and proved good IFAs come into their own when the going gets tough.

Our winner, in the toughest environment advisers have experienced for years, perhaps ever, is Keith Thomson, of Blackadders in Dundee, who the judges commended for a dogged determination to remain as close to his original asset allocation as possible, which they felt was very much in keeping with the spirit of the competition.

To find out how he did it and where the judges felt the competition was won and lost, see the IFA of the Year supplement in next Saturday's Scotsman