In a context like the current one, in which one dominates the markets good dose of volatility, investors are asking which is the best tool for protect yourself and at the same time have a good performance. On the one hand, the fact that the pandemic is loosening its grip bodes well for the economic recovery and this would provide a certain tranquility in investments. On the other hand, however, the fears of a geopolitical crisis, the rise in inflation, especially in the energy sector, make investors very cautious.
In a situation like this a prudent and gradual approach might be the best choice, for example through the Capital Accumulation Plan (PAC). It is a periodic investment technique (monthly, quarterly, half-yearly, annually), which takes place regardless of the trend of the financial markets, with the aim of mediating the various phases of ascent and descent and building a final capital (objective ), without having to worry about market fluctuations.
The financial consultancy company Alfa has indicated in its newsletter what they are the advantages and disadvantages of this type of investment, to whom they are indicated and what are yours features.
What are the benefits of the CAP?
One of the positive characteristics of the PAC is the way of entering the capital market: it is within the reach of any type of investor, regardless of the size of the starting capital, since it provides installment payments. "It is particularly used by investors in planning when it is possible to access collective savings instruments (mutual funds, UCITS, ETFs, pension funds) which allow good diversification even with limited amounts" they tell Alfa.
But there are at least two other consequent advantages: on the one hand this strategy allows to overcome the stress of finding the perfect timing for market entry (market timing) precisely due to the fact that it is divided into a broad period of time at basically predetermined and non-discretionary intervals. On the other hand, there is one mediation of average loading prices of the financial instruments in which one is investing (the average carrying price is the weighted average of the prices paid for the purchase of a financial instrument at different instants). This implies a reduction in the volatility to which the investment is subject.
What are the principles to follow to correctly set up a savings plan?
Alpha locates seven golden rules in order not to make a mistake in the choice:
- Before starting the investment, define the time horizon: this is essential for determining the plan's asset allocation at various times. In fact, as the expiry of the plan approaches, it may be appropriate to replace the more volatile instruments with more conservative solutions.
- Use low-cost tools. It is useless to persist in accumulating sums on mutual funds which in the long run end up having a performance lower than the market, as documented by the product performance statistics. Especially since there is a risk that the instrument on which one begins to accumulate could be closed or merged with other instruments of a similar type.
- Carefully select accumulation tools: this shrewdness is of vital importance to make the most of the effect of compound interest, the engine of the returns that will be achieved at the end of the plan.
- Avoid taking specific risks: in the choice of investment instruments on which to carry out a CAP, it is better to aim for the greatest possible diversification at every level: sectoral, currency, geographical.
- Set the purchase frequency tools: it is important to obtain the right trade-off between frequency and commission impact. A threshold that could help choose the right periodicity could be setting the installment so that the commission impact does not exceed 0,2% of the transaction.
- Prefer tools that use a physical replica of the index: in this way the financial instruments in which you invest are physically held and you are less exposed to counterparty risk (present in the swap replica). Prefer highly liquid instruments (AUM) and traded on major stock exchanges (adequate stock exchange trading volumes).
- Do not accumulate on instruments covered by exchange rate risk (EUR – hedged): in the long run, the currency market tends towards equilibrium; moreover, if a good currency diversification has been carried out, the fluctuations of the instruments invested in the different currencies compensate each other.
Choose in Pac or a Pic? This can be the dilemma
Investors are often faced with the dilemma: Pic or Pac? The CAP is opposed to the investment strategy PIC (capital investment plan). In fact, through the Pic you choose, having an initial capital available, to invest the entire sum in a single moment. It goes without saying that it raises two types of questions: first of all the need to have initial capital, secondly the fact that it presents a higher volatility than the CAP.
The PAC, on the other hand, is suitable for those who do not have an initial capital from which to start investing and allows greater control of the emotion caused by market trends and to obtain positive returns under different market conditions: in a bull market the PAC and the PIC return positive returns to the investor, but the same thing may not happen in a lateral condition of the markets.
