What is a safe investment?

For most people investment objectives flow from life planning goals. So the desire to reduce work commitments or to retire completely - or to build contingency funds for any number of other potential outcomes - will trigger the decision to forgo immediate consumption and to invest capital.

A common approach to portfolio construction has been to ensure that the client has sufficient funds for short-term contingencies – money often placed in cash or deposit-based investments – with the balance placed in equity-based investments, in order to achieve greater growth or income.

Such a strategy can often be validated by the attitude-to-risk questionnaire which is integral to the financial planning process. However there is wide variation in the construction of these questionnaires and considerable variation as to what different investors understand by terms such as risk. Many would take risk as indicating probability of future loss. Regrettably, almost all would assume that sustained performance - despite the caveats - gives a solid basis for predictability of future returns. Other seek safety through diversification but unfortunately all diversification can achieve – assuming non-correlating investments are chosen - is the reduction of the chance of loss and also of excessive gain. Of course many investors feel safe only in cash-based investments or, until recently, in property – the revered bricks and mortar. Yet such cash investors will rarely experience a real return on their capital unless they, usually unknowingly, seek excess returns from lower grade institutions.

Consequently it’s sometimes worth reminding ourselves of the basics – i.e. that with unprotected equities, it is possible to experience a dramatic or complete loss of capital. It is the same story with property-based investment, although - despite potential liquidity problems - complete loss of capital is almost impossible. With cash-based investments capital is only at risk to the extent that the backing institution may default. Lower grade banks or those operating in weaker countries should not be seen as “safe”.

Outcome-orientated investments

Structured products - or as we prefer to call them “protected investments” - are essentially outcome-orientated investments. They are usually defined by the benefit they offer after a set investment period. Where full capital protection is provided they can be seen as cash-plus investments; where protection is contingent or partial then it may be better to view them as alternatives to equity-based investments. Safety for such products stems firstly from the strength of the company backing the product – in our case Barclays Bank (AA-rated by Standard & Poor’s), and secondly from the nature of the return - the conditions for which are clearly stated in all Barclays Wealth protected investments. From a consumer point of view such clearly stated returns – which will by definition never be “exciting” - may be viewed as “safe”.

It is crucial to distinguish between safety and guarantees. No guarantee attaches to any product simply because the return will always be ultimately dependent on the financial health of the backing entity. Even products backed by the government should not claim an absolute guarantee.

Finally a crucial aspect in the safety mix has to be transparency. We endeavour to describe our products as clearly as possible and our client brochure (Order Literature) explains why our products may not be suitable for some investors, as much as it explains why they may. Indeed, we lead the sector in calling for complete counterparty transparency - and in always making it completely clear that Barclays Bank backs our products.