Weekend reading: Tears for fears

What caught my eye this week.

A reader, John, emailed me about an old article this week. He pointed to a spreadsheet function could be used to calculate the cash component of a DIY guaranteed equity bond.

If you’re thinking “what’s that?” you won’t be alone.

That article was published in 2010. Memories of the huge financial crash were still fresh. Many people I knew were scared of putting new money into markets.

Enter the guaranteed equity bond!

Varitations of this financial product – widely-trumputed in swanky newspaper adverts at the time – promised to almost always return your money to you a few years hence, as well as giving you some of the gains on a stock market index.

Of course it wasn’t called the Almost Always Bond. But the small print contained strange catches and odd hurdles. These meant you could indeed get less back than you put in.

In addition dividends were usually ignored in the return calculation. And there was also little if any mention of the fees the financial provider would enjoy.

The bond was constructed out of derivatives contracts. Hence those specifics in the terms and conditions. I’d strongly suggest the target market for a product like this is poorly-placed to evaluate the odds of the FTSE 100 being above 8,235 on a particular day in March 2025, for example – as if anyone really can. But that implicit calculation was in the mix.

My piece explained how to create nearly the same thing for yourself from a mix of cash and a tracker fund. But with none of the complexity and opacity.

Shout

I considered updating my article for 2022, working in John’s technique. (John suggested using the CUMIPMT function from the free LibreOffice spreadsheet tool, if you’re curious).

But then I realized it has been years since I’ve seen an advert for a guaranteed equity bond.

I’m sure they still exist. But back in 2010 they were ubiquitous!

Perhaps there is a role for such a product – if appropriately demystified for the average person.

But what drives the marketing of them is clearly customer demand, not present utility.

Head Over Heels

Last year saw stock markets hit high after high. Remember all the articles about peak US valuations and a tech stock bubble and the general mayhem and euphoria?

If there was ever a time to consider investing in a product that capped your gains in exchange for protecting you from at least some of a crash, this was it.

But I don’t remember the financial services industry riding to the rescue with a marketing blitz for guaranteed equity bonds.

Doubtless it knew punters wanted more excitement and risk in a bubbly market. Not a crash bag.

Mad World

Should shares continue to turn down with rate rises, inflation, and war, then eventually we’re bound to see another moment in the sun for products that promise investing alchemy.

As Josh Brown puts it:

As you’re reading this, someone is hard at work in a lab somewhere cooking up the next big idea in Upside Minus Downside technology.

It might be an ETF. It might be a hedge fund. […] A structured note.

Who knows what form it could take next time?

The details will change, the wrapper will seem revolutionary, but the underlying idea will be a story as old as time.

And it will captivate the minds of some of the most intelligent people around. Doctors, lawyers, bankers, brokers, scientists, builders, politicians. None of us are completely impervious to a story that good.

Have a great weekend!

From Monevator

It’s not fair! Sequence of returns risk – Monevator

InvestEngine review – Monevator

From the archive-ator: Never say never again – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1

Bank of England hikes rates to 0.75%, expects inflation to hit 8% soon – Sky

Treasury considers advice/guidance reform – CityWire

Men’s suits dropped from inflation basket, antibacterial wipes added – ThisIsMoney

HSBC to close these 69 branches in 2022 – Which

Buffett’s Berkshire Hathaway breaks above $500,000 a share – CNBC

UK can eliminate Russian gas this year, study finds – Guardian

Forgotten bank account pays out 60 years later – BBC

Covid resurgent in UK with infections in over-70s at record high – Guardian

Great Depression or bust – Of Dollars and Data

Products and services

Netflix plans to start charging for password sharing, running trials – NPR

The best deals on Cash ISAs (but they won’t beat inflation) – ThisIsMoney

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

Nine ways to cut your household bills – Be Clever With Your Cash

Amazon credit cards to change from 2023 – Which

Time-limited offer: open an account with InvestEngine via our link and get £25 when you invest at least £100, PLUS additional cashback when you invest £1,000 or more in an ISA (new customers only, T&Cs apply) – InvestEngine

Could a 0% balance transfer credit card help you clear debts? – ThisIsMoney

Homes for sale from the 1960s, in pictures – Guardian

Comment and opinion

Why I’ll never buy an active investment fund again [Search result]FT

Managing uncertainty, the biggest risk of all – Advisor Perspectives

How to crack HMRC’s tax codes – ThisIsMoney

In case you’re wrong – Humble Dollar

Name that fund manager – Quietly Saving

Life’s a circus – Humble Dollar

Budget to beat the rising cost of living [Podcast]FT Money Clinic

Extremely bad decisions – Behavioural Investment

Tom Brady, retirement planning, and retirement remorse – Forbes

What does the global debt overhang mean for interest rates? – Joachim Klement

How to make $400,000 on a single real estate investment – Banker on FIRE

Liquidate – Indeedably

The art of money – The Root of All

Recession risk mini-special

Rising recession risk [US but relevant]Pragmatic Capitalism

Surging oil prices have economists worried – Full Stack Economics

Predicting the next recession [US but interesting]Calculated Risk

Risk of UK recession grows despite January boom – Evening Standard

Crypt o’ crypto

Ukraine partners with FTX and Everstake for crypto fundraising – The Block

NFTs have crashed but don’t despair – Howard Lindzon

The Bored Ape Yacht Club’s deal for CryptoPunks is all about IP – Protocol

Naughty corner: Active antics

5×2 matrices that can help you become a better investor – Validea

Cliff Asnes: value stocks not just an interest rate bet – Institutional Investor

Which analysts to follow – Klement on Investing

Wise words from Walter Schloss – Novel Investor

Kindle book bargains

Posh Boys: How English Public Schools Ruin Britain by Robert Verkaik – £0.99 on Kindle

Poverty Safari: Understanding the Anger of Britain’s Underclass by Darren McGarbey – £0.99 on Kindle

Hacking Growth: How Today’s Fastest-Growing Companies Drive Breakout Success by Sean Ellis and Morgan Brown – £0.99 on Kindle

The Almighty Dollar: Follow the Incredible Journey of a Single Dollar to See How the Global Economy Really Works by Dharshini David – £1.89 on Kindle

Environmental factors

Growing the Pie: a different take on ESG [Podcast]Rational Reminder

Electric planes are coming sooner than you think – Afar

Great Barrier Reef hit by sixth bleaching event – Guardian

Off our beat

Slobbing out and giving up: entering ‘goblin mode’ – Guardian

The global oil market is based on a fiction – The Atlantic

Putting ideas into words – Paul Graham [h/t Abnormal Returns]

Children of Men is really happening – Wrong Side of History

Reassessing the women of The Godfather at 50 – BBC

Put yourself in their shoes – Spilled Coffee

And finally…

“Perhaps there’s no better act of simplification than climbing a mountain. For an afternoon, a day, or a week, it’s a way of reducing a complicated life into a simple goal. All you have to do is take one step at a time, place one foot in front of the other, and refuse to turn back until you’ve given everything you have.”
– Ken Ilgunas, Walden on Wheels: From Debt to Freedom

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Whatever happened to the guaranteed equity bond? Plus the rest of the week’s good reads…
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