| You may have read that as you near retirement | | | | Although gilts and corporate bonds are normally |
| you should increasingly be moving your | | | | recommended for cautious investors, investment |
| investments from equities into bonds. The reason | | | | bonds are different in that they offer potentially |
| for this advice is that although bonds generally | | | | much higher rewards but also carry a much higher |
| offer less opportunity for capital growth, they | | | | risk. Because even gilts can be influenced by |
| tend to be lower risk as they are less exposed to | | | | timing and other factors, if you are thinking of |
| stock market volatility and also have the | | | | buying bonds, expert advice is very strongly |
| advantage of producing a regular guaranteed | | | | recommended. |
| income. Although normally recommended as | | | | Investment bonds |
| sensible, a particular problem owing to the recent | | | | Definition: This is the method of investing a lump |
| downturn in the stock market is that you could | | | | sum with an insurance company in the hope of |
| make a loss by selling some of your shares now, | | | | receiving a much larger sum back at a specific |
| whereas possibly if you wait, they might recover. | | | | date - normally a few years later. All bonds offer |
| A bigger problem is that there are different types | | | | life assurance cover as part of the deal. A |
| of bonds, with varying degrees of risk, which it is | | | | particular feature of some bonds is that the |
| important you should understand. | | | | managers have wide discretion to invest your |
| The three main types are: government bonds - | | | | money in almost any type of security. |
| called gilt-edged securities or 'gilts' - corporate | | | | Although bonds can achieve significant capital |
| bonds and investment bonds. Gilts are the least | | | | appreciation, you can also lose a high percentage |
| risky as they are secured by the government, | | | | of your investment. An exception is guaranteed |
| which guarantees both the interest payable and | | | | equity bonds, which, although linked to the |
| the return of your capital in full if you hold the | | | | performance of the FTSE 100 or other stock |
| stocks until their maturity. Corporate bonds are | | | | market index, will protect your capital if shares fall. |
| fairly similar except that, as opposed to loaning | | | | However, although your capital should be returned |
| your money to the government, you are lending | | | | in full at the end of the fixed term (usually five |
| it to a large company or taking out a debenture. | | | | years), a point not always appreciated is that, |
| The risk is higher because, although you would | | | | should markets fall, far from making any return |
| normally only be recommended to buy a | | | | on your investment, you will have lost money in |
| corporate bond from a highly rated company, | | | | real terms: first, because your capital will have |
| there is always the possibility that the company | | | | fallen in value, once inflation is taken into account; |
| could fail and might not be able to make the | | | | second, because you will have lost out on any |
| payments promised. In general, the higher the | | | | interest that your money could have earned had |
| guaranteed interest payments, the less totally | | | | it been on deposit. |
| secure the company in question. | | | | |