Warning: Four investment no-nos that could leave you burned and broke
THE woeful interest rates that are being offered to savers with deposit accounts have prompted many investors to eye up other investment products in the hope of making better returns. So too has the changing investment climate.
Investors can lose a lot of money if they jump into unsuitable or risky products. Here are some investments that could spell trouble...
Credit-linked notes
The Central Bank recently issued a warning that creditlinked notes are very risky and unsuitable for most consumers. With credit-linked notes, you invest in a borrower’s credit risk.
As long as the borrower (which is typically a company) does not experience a ‘credit event’, you receive interest payments and — once the notes have matured — your original money back.
If a credit event occurs, however, you could lose a lot of the money you originally invested and you can also kiss goodbye to the interest you were expecting. A credit event can include a liquidation, company restructuring — or government intervention to prop up a company.
Long-dated bonds
Inflation is expected to increase. Longdated bonds could be among the biggest casualties of higher inflation. Should you have any bonds in your pension or investment portfolio, understand which ones you have money in — and don’t invest in a bond for more than five years, according to Brian O’Reilly, head of global investment strategy with Davy.
Tracker and investment bonds with partial capital guarantees
In recent years, many tracker bonds and investment bonds have become more complicated and have started to offer soft capital guarantees — where you only get back the money you originally invested in certain scenarios. Unlike the capital guaranteed products sold in the past, many of today’s tracker and investment bonds only offer capital ‘guarantees’ of 90pc or 95pc. So you could lose 5pc or 10pc of your money after investing in them.
Furthermore, the returns delivered by these products are often worse than the interest paid on ordinary deposit accounts.
Currency
“With Brexit and Trump’s nomination, sterling and dollar are both extremely volatile,” said Ross Curran of Curran Financial Services.
“The opportunity for significant returns can tempt individuals to invest in currency. This is a dangerous gambit and most people who try to make money in this area lose heavily.”