Lots of investors in Ireland are advised by Irish brokers to put their money into capital protected investments. At Moneycube, we believe these investments aren’t right for most people.
Capital protected investments (also sold as kick-out bonds, tracker-bonds and guaranteed structured products) are sometimes presented as a one-way bet.
You might thing your capital is guaranteed, and your investment can only go up. Not so.
Here are five reasons to walk away from these products.
1. The guarantee is not guaranteed
It might look like there’s no risk, but in reality many of these bonds offer a limited guarantee. For example, here’s a current investment opportunity which says it offers a “robust capital protection feature”.
But scroll down a couple of lines, and you’ll read that if the index it tracks falls more than 40%, “you will lose the same % by which the Index has fallen” – ie at least 40%!
So just when you need the guarantee, it’s not there.
On top of that, your guarantee is provided by a counterparty bank. As most of these investments last several years, you’re taking a medium-term risk that the bank that provides the guarantee will be able to pay up if necessary.
2. The guarantee comes at a cost
Most capital protected products work by engaging a bank to guarantee the downside.
It won’t surprise you to learn that banks don’t do this for free. The guarantee costs money, which reduces your investment return. Rory Gillen has estimated this can cost around 3% of your money per year. Ouch.
(Here’s another excellent article by Rory Gillen on the topic).
3. The structure comes at a cost
More generally, the charges in structured products are a substantial.
Brokers typically receive around 2.5% of your investment for selling you one of these.
The product provider will help themselves to another 2% or more. (Here’s an example).
And then there are the numerous investment management fees, for example listing the investment on a stock exchange, buying the capital “guarantee”, custodian fees and so forth.
That is more than you should be paying to invest your money.
In short, the costs of structuring a product seriously erode your potential to gain decent investment growth.
4. No flexibility
Capital protected products suffer from being seriously inflexible.
Usually, you’ll need at least €20,000 to invest.
You’ll be unable to top up your investment.
And heaven help you if you want to withdraw your cash early.
Most require you to lock your money up for five or more years. Early withdrawal is usually at the investment company’s discretion, and comes with additional fees. And of course your money is not guaranteed if you happen to want it sooner.
5. The tail is wagging the dog
Investors in structured products end up in some pretty arbitrary investments.
This year, for example, you can put your money into bio-energy plants in the north of England, or link it to the share price performance of telecoms company BT, or the top 50 companies in France and Germany.
Pretty random stuff.
Think carefully before you expose your cash to the performance of some very specific assets.
So what’s the alternative?
Investing is about growing your money in a planned, diversified way over time, with a risk level that’s appropriate to you.
We believe splitting your money between truly (and cheaply) guaranteed bank deposits, and diversified, professionally managed investment funds at the right risk level for you is a much better solution to grow your wealth over time.
In reality, there is only one money guarantee worth having. That is the government-backed guarantee of bank deposits. If you really can’t afford to risk losing some money (for example, with your rainy-day fund), it should stay in the bank.
Conversely, if you really want to grow your money over time, investment funds are the best-value, best-managed, and most flexible way to do it. Moneycube can help you do that.
Get started with Moneycube today.