When the stockmarket starts to look rocky, banks waste no time touting schemes that offer protection from market falls. So it's no surprise that the finance pages are full of adverts for guaranteed equity bonds (GEBs).
GEBs are all pretty similar. They run for a fixed term and are linked to the performance of equities, but they guarantee to return your capital in full if the market drops, says Paul Farrow in The Sunday Telegraph.
Now this seems like the best of both worlds, doesn't it? You cash in if the market rises, but don't lose out if it falls.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
But GEBs are not all they seem and most people would do well to avoid them. The bonds are only linked to equities. They don't invest directly in the market, so you don't get any dividends. You might also get only part of any gain in share prices.
And while the guarantee is obviously a comfort, you would still lose money if the market dropped, because you get back only your original investment. If you take inflation into account at, say, 2.5%, your £100 would be worth only £92.60 after three years.
Most of the recent articles on GEBs fail to mention one of their most serious drawbacks: tax. The structure of some of the bonds means you have to pay income tax, rather than capital-gains tax, on any profits. Higher-rate taxpayers watch out!
-
Most expensive street in Britain to buy on has houses with '£10m average asking price', Rightmove findsNews Rightmove found Buckingham Gate, close to Buckingham Palace, was the most expensive street in the country. Do you live near one that's been included on the list?
-
Smaller companies: starting to turn?The long-awaited turnaround in smaller companies is unlikely to happen just because shares are lowly-valued. However, an improving economic and interest rate backdrop could spark renewed interest in the sector. M&A activity is also providing support for the smaller companies sector
