Three ‘bad idea’ investments

With the continuing market volatility, it is only natural that some investors will be considering their own flight to safety.

When traditional investments are under threat, there are very few really ‘safe’ alternatives to consider.

Cash should represent a stable asset class.

In the current economic environment, with a combination of low interest rates and high price inflation, cash is only usually suitable as a short-term home.

Using cash as a safe-haven also introduces the risks of market timing.

It requires that investors accurately time their exit from the market and also their entry back into the market. There is a real danger that this exit will occur when equity values are low and the entry when they are higher.

If you exceed the compensation limits of the Financial Services Compensation Scheme (FSCS), you are relying on the financial strength of an individual bank for the security of your cash savings.

With many banks exposed to eurozone debt, there is potentially very bad news still to come from the banking sector, should any of the peripheral European economies default on their debt.

Another ‘bad idea’ asset class in times of market volatility is gold.

The price of gold currently stands at a record high, which means that investors could end up selling equities when they are at a low value and buying gold near the top of its price range.

Accessing gold as an investment is also often problematic.

Many Exchange Traded Funds (ETFs) offer the quickest access to the gold ‘spot’ price, doing so on a daily pricing basis. This means that investors receive the change in value in the asset each day, rather than the long term performance of the gold price.

If as an investor you are buying gold because you are very pessimistic and believe the current world order is coming to an end, really the only option to consider is holding physical gold.

This results in gold being expensive to acquire, store and insure. Expect to pay a big premium over the current record high gold price to purchase gold coins or bars.

Another bad idea investment in the current climate is any form of structured product.

These are often favoured by the banks and offer a ‘guaranteed’ return linked to the movement of stock market values.

We expect to see a glut of these structured products coming to the market shortly, as banks aim to profit from investor nervousness and market volatility.

In addition to the dubious security of their guarantees, the index values on which structured product returns are based can be difficult to quantify in advance.

As an investor, you usually have to accept a future ‘strike date’ for investment and then a period of averaging (often over three months) at the end of the fixed investment term.

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