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The Power of Pre-Authorized Contributions (PACs) & Dollar Cost Averaging (DCA) Thumbnail

The Power of Pre-Authorized Contributions (PACs) & Dollar Cost Averaging (DCA)

A topic the team has been talking about a lot lately is running PAC plans. Last week, one of our favourite bloggers wrote about this strategy: The Best Investment Strategy For This Market.

Despite being acronym heavy, these are two simple concepts that provide investors with some great benefits.

What is a Pre-Authorized Contribution (PAC) Plan?

  • A PAC is a program that automatically invests a fixed dollar amount on a pre-set day of the month.
    • Example: $500 is drawn from your chequing account on the 15th of every month and invested into a mutual fund of your choice. 

What are the Benefits of a DCA Approach?

  • Set & Forget.
    • Setting up a PAC is a single form requiring only 1 signature.
  • Remove Emotions From Your Investment Decisions. 
    • Don’t discount the power of this!
    • When stocks are down (cheap), you buy more of them. 
    • When stocks are up (expensive), you buy less of them.
  • It helps the “Sleep At Night” Factor 
    • A DCA approach means avoiding investing all of your savings at the top of the market.
      • Instead you might invest a few months around the top, but you’ll also invest a few months around the bottom.
    • Loss Aversion is a well documented phenomenon where losses feel about twice as painful as an equivalent gain feels good.
      • Picture finding a $20 bill on the ground vs not finding a $20 bill you put in your wallet.

A Chart on how a DCA Approach has Performed

  • The below chart shows the growth of $100 in a PAC plan. 
  • How to interpret: The furthest left column shows that $100 invested in January 2007 is worth ~$250 today.