Beware of any investment that's marketed as 'safe'. As Harvey Jones reveals, these are often a quick route to the poor house.
If there is a single word that should strike fear into the heart of any investor, it has to be the word "safe". Because as we have discovered in recent months, there is almost no such thing as a safe investment.
This isn't just a figment of the credit crunch, safe investments have consistently proven deadly dangerous for many years. Just look at the roll call of investments that were originally marketed as low-risk vehicles but ultimately crashed and burned.
All too often investors were sold what was supposed to be a Volvo, but discovered too late it was an unroadworthy killing machine with clunky acceleration and dodgy brakes.
Hall of shame
Split capital investment trusts were sold as a safe way of beating low interest rates, until the sector collapsed in a £700 mis-selling scandal.
Precipice bonds were promoted as a fixed source of high income, but only sustained this by raiding investors' capital.
With-profits bonds were sold to millions of low-risk investors, but their famous "smoothing" effect turned out to be frighteningly choppy.
Structured funds typically offer capital guarantees, but try telling that to investors in the NDFA Capital Secure Fixed Rate Plan, backed by Lehman Brothers.
And as I reported last week, the cautious managed sector was promoted as a safe haven, yet crashed 20% in the last 12 months.
Safe as house prices
All these investments have one thing in common. They were marketed at older, risk-averse investors, who were keen to find a safe home for their money.
But safe won't protect you against inflation, so most of them understandably wanted to generate a slightly higher return than they could get on cash. The industry was willing to jump through hoops to provide it, and that is where the troubles began.
I want it all
It isn't easy to deliver a combination of capital safety and an inflation-busting return.
Structured products mostly did this by using a complex web of derivatives that few private investors (or their advisors) really understood.
With-profits bonds invested in riskier assets such as equities, property and cash, then protected themselves by penalising investors who withdrew their money when times were hard.
Precipice bonds guaranteed investors' income at the expense of their capital.
Magic tricks
So most of the troubles were caused by the attempt to play it safe, but with a little sex appeal. Other failures were incidental. The splits sector didn't collapse because it was safe, it collapsed because of collusion between a "magic circle" of managers, who were investing heavily in the shares of other splits. So that when one trust failed, others quickly followed in a domino effect.
This reveals another danger: safe investments will always be at the mercy of dodgy dealings behind the scenes.
Is nowhere safe?
The problem is that, thanks to the credit crunch, nowhere can be called safe anymore. Least of all cash. Millions would have lost their life savings in the biggest financial services scandal ever, if the taxpayer hadn't stepped in to save the day.
Even sovereign governments aren't safe, as investors in Icesave discovered.
Stop fiddling!
So what should investors do? The first thing is to mistrust anything that promotes itself as safe. Risk is everywhere.
If the investment in question is exposed to higher-risk asset classes such as equities, backed by a fiddly derivative-based mechanism, or applies hefty penalties if markets move the wrong way, then it is likely to go horribly wrong.
It's in the mix.
It is better to have a balanced portfolio, with the asset mix of equities, bonds, cash and property that reflects your own attitude towards risk, than some clever structure that promises you the best of both worlds.
And remember to reduce your risk by spreading your money around, so if the worst happens, you won't lose everything.
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