There's been a lot of talk this past week of Guaranteed Equity Bonds (GEBs) and how with the stockmarkets taking a bath they have the advantage of guaranteeing 100% of an investors money should the market go down and stay down. GEBs are also marketed with the perceived 'advantage' that if the market rises the bond pays back more than the percentage increase say 125% or 150%.

Sounds like investing nirvana, right?

Wrong.

There are many things that we dislike about GEBs as we've highlighted on the LearnMoney site before. These include -

• No dividend income which on the FTSE 100 equates to around 2%-4% a year - For example over the past 5 years the FTSE 100 index has returned 13% including dividends but strip this income out and the return is a negative 4%
• GEBs are incredibly inflexible tying investors money up for around 5 years - As a rule of thumb you always want your money and investments to remain as flexible as possible
• Yes you get the money back if the market falls but still lose in nominal terms because £1,000 today is not the same as £1,000 in 5 years (especially with inflation getting out of control as it is now)
• Many Financial Advisors (IFAs) refuse to recommend GEBs to their clients because they can't work them out or understand them
• Each GEB is slightly different from another so comparing like with like is almost impossible (so called confusion marketing is just how the financial companies like it)
• Charges - On first appearances GEBs seem to have no charges but the reality is far different -

  Often 3 sets or charges are deducted (skillfully, without the client really knowing or understanding but still 100% legal) - the company that creates the bond, the financial company that acts as the provider and then the financial advisor who sold it

  Between these 3 initial charges can often amount to up to 7% meaning that on day 1 only 93% of the money invested in actually invested in the GEB

All these problems are bad enough but THE main problem we have with GEBs is that they're designed by some of the best minds working within the financial markets and subsequently sold to customers in the retail market. So on one hand you have the designers whose main job is to generate profits for their banks selling a product to retail clients who they know full well won't properly understand how they work.

So it doesn't take a genius to work out who is going to get the better end of the deal every time.

So in reality, Guaranteed Equity Bonds are a licence to print money for the institutions because they can engineer the products so they are pure profit with no risk. You think a bank is going to take a loss on these products if the market falls 10-50% over the next 5 years? No way, the products themselves will all be perfectly hedged so whatever the market does the bank will still its money.

Summary

In the stockmarket investors cannot have it both ways, ie no downside potential only upside so beware of anyone who tries to sell you a product that offers this investment bonanza. GEBs are marketed to give this illusion but an illusion is exactly what it is.

The advice is therefore simple and the same for all investors - if you don't want the potential of losses that can materialise in the stockmarket, keep your money in fixed income securities and/or in savings accounts.