Your golden rule for a gilt-edged investment

The perfect time to invest in a market is when people are keen to tell you that prices are low, and will not get much better. That is how many investors still view gilts (IOUs issued by the Government), even if they have had a bit of a rally since the start of the year. All the same, if you worry that share prices are too high, and may tumble, buying gilts, through a unit trust, or even by picking individual bonds, may be shrewd.

The perfect time to invest in a market is when people are keen to tell you that prices are low, and will not get much better. That is how many investors still view gilts (IOUs issued by the Government), even if they have had a bit of a rally since the start of the year. All the same, if you worry that share prices are too high, and may tumble, buying gilts, through a unit trust, or even by picking individual bonds, may be shrewd.

Gilts represent real security in a non-inflationary world. Once you buy them, the yield - or regular income - you collect is fixed. At the moment, the average yield works out at about 5 per cent, more than twice as much as for the average FTSE company.

What happens to the capital will normally reflect interest rates and inflation rates. Both are relatively low, and show few signs of rising. But gilts prices will also reflect what other opportunities are available.

The golden rule to remember is: when stock-markets fall, demand for gilts, and therefore their price, is set to rise.

What makes people suspect share prices may drop? The FTSE 100 and the American Dow Jones indexes are very high, despite all the troubles of the dot.com companies.

Admittedly, some gurus have been predicting a fall for some time, only to be proved wrong so far. Predicting the timing of any downturn is all but impossible, but there are certainly signs that share prices have overheated.

Small investors have poured huge sums into the market this year, much of it via ISAs, with their tax advantages. That is worrying because, historically, small savers tend to come in at the top. What is more, the economy is beginning to slow down. Figures from the Halifax for last month show house prices have actually started falling - and retail sales generally have begun to drop.

Britain is only one part of a global economy, where every market seems interlinked - with Wall Street having the biggest impact of all.

"There are worrying signs of the kind of frenzy among private American investors, which usually means falling share prices later," says James Higgins, of independent financial adviser Chamberlain de Broe. If share prices start to fall, demand for gilts looks set to rise, but that is only part of the story. The total number of gilts available to investors has fallen, because the Treasury has not issued many recently. To put it crudely, this is because the British economy has performed better than expected, thus lessening the need for the state to borrow to finance public spending. The resulting squeeze on the number of gilts in issue will help prices to rise.

Equities have produced better overall returns than gilts, or other fixed interest stocks, for the vast majority of five-year periods in the 20th century. There is no point in switching all your holdings out of unit trusts or investment trusts into gilts if you can afford to think long-term. But shifting at least a little money there may be wise.

How do you invest in gilts? The best way is through a gilts unit trust. M & G and Whittingdale have good records. Charges for gilts funds are generally lower than those for the standard unit trusts, and Whittingdale's funds do not have the standard front-end charge which eats up 3 to 5 per cent of your money on equity unit trusts. Its only levy is a one per cent annual management charge.

Meanwhile, you can always get individual gilts cheaply from the Bank of England's registrar's office. But you have to make your own choice in what is a very complex market.

M&G Securities 0800 390 390 or www.mandg.co.uk

Whittingdale 0207 623 2444