The Fixers: No guarantee is set in stone

THE TIME has come the Walrus said, to think of many things, of ships and shoes and sealing wax of cabbages and kings and why the sea is boiling hot and whether pigs have wings.

"I do like reciting that poem," I said to Mary, as she sat herself down on my Chesterfield. "Do you realise I won a school prize for my recitation of it at the tender age of 10?"

Trying not to laugh out loud, Mary enquired: "Was that in short trousers by any chance?"

Somewhat defensively I said "I'll have you know, there is a link between Lewis Carroll's poem and guaranteed investments."

Mary replied: "As far as I am concerned, guaranteed investment products seem particularly appealing when stockmarkets are as wobbly as ours appear to be."

I said: "Guaranteed investments are a paradox. On the one hand we all like to think that when something is referred to as guaranteed it means just that..."

Mary was one step ahead of me: "I'm not sure I want to hear what your going to say next - in fact don't tell, let me guess. Even when something says it is guaranteed it is not necessarily guaranteed."

Now it was my turn to smile: "That's right. It never ceases to amaze me that even when we put our money into the building society we are still taking a risk."

"This time I am confused," she retorted. "How on earth can placing my money on deposit be taking a risk. After all, I can put pounds 5,000 in my account today and know it will be pounds 5,000 plus interest in 10 years' time."|

I replied: "The capital will be there and the interest but the risk dimension is inflation. If it has risen at a faster rate than the rate of interest then the capital will be worth less in real terms.

"None of us should view anything we do with our money as being without risk. By coming to terms with this we can reconcile the price to be paid for having less risk."

Mary asked: "OK, so how does this fit in with other guaranteed investments?"

I replied: "That's easy. We are all apt to see the word 'guaranteed' as something which can be relied upon without asking ourselves how financially strong the company offering the guarantee actually is?"

"Does this mean I have to read a balance sheet to work out who is safe?"

My answer was: "No, but it does mean you or your adviser should pay particular attention to the small print in any literature you are given - it always pays to be vigilant."

Here are some good rules of thumb:

t When an organisation offers a guaranteed product remember to ask under what circumstances would this guarantee not be met?

t If a product refers to it being 'capital-protected' remind yourself that this is not the same as 'guaranteed'. What it normally means is somebody else is providing the guarantee, so you have to think about that company's strength. You will sometimes find that a company offering a capital secure product is a better choice than a company offering a guaranteed product.

t Some guarantees require a certain event to happen before the capital is paid back, such as the FTSE 100 being higher in five years time than its starting point.

Roddy Kohn is principal at independent financial advisers Kohn Cougar, at Wellington House, Wellington Park, Clifton, Bristol, BS8 2UR (0117 9466384)