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.

This is an example of a Dollar Cost Average (DCA) approach.

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.
- This is an excellent visual that shows some of the most chaotic periods of market volatility represent the best investment opportunities.
  - 2008 stands out significantly as do 2012, late 2015/early 2016 and March 2020.
- NOTE: There are only 3 periods (all in 2022) where the original $100 is worth less today than when originally invested.