In a period characterized by many uncertainties, the Capital Accumulation Plan (CAP) could be a good choice for savers. What are the advantages and disadvantages
In a context like this, where we dominate the markets good dose of volatilityinvestors wonder what is the best tool to 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 economic recovery and it would bring some peace of mind in investments. On the other hand, however, fears of a geopolitical crisis, rising inflation, especially in the energy sector, make the investor very cautious.
In a situation like this, a cautious and gradual approach might be the best choice, for example by Capitalization scheme (PAC). It is a periodic investment technique (monthly, quarterly, half-yearly, annual), which intervenes independently of the evolution of the financial markets, with the aim of arbitrating the various phases of rise and fall and to constitute a final capital (objective), without having to worry about market fluctuations.
The financial consultancy Alfa indicated in its newsletter what they are the pros and cons of this type of investment, to whom they are indicated And which are yours characteristics.
What are the advantages of the CAP?
One of the positive characteristics of the CAP is its mode of entry into the capital market: it is within reach of any type of investorregardless of the size of the starting capital, because it provides installment payments. “It is particularly used by investors in the field of pensions when it is possible to access collective savings instruments (OPC, UCI, ETF, pension funds) which allow good diversification even with limited amounts. “they specify. Alpha.
But there are at least two other consequent advantages: on the one hand, this strategy allows you to overcome it the stress of finding the perfect timing for market entry (market timing) precisely because it is spread over a long period of time at fundamentally predetermined, non-discretionary intervals. On the other side there is a mediation of average freight prices financial instruments in which you invest (the average accounting price is the weighted average of the prices paid for the purchase of a financial instrument at different times). This implies a reduction in the volatility to which the investment is subject.
What are the principles to follow to properly set up a capitalization plan?
Alpha locates seven golden rules do not make a mistake in the choice:
- Before starting the investment, define the time horizon: this is essential to determine the asset allocation of the plan at different times. Indeed, as the plan’s expiry date approaches, it may be appropriate to replace the most volatile instruments with more conservative solutions.
- Use inexpensive tools. There is no point in hoarding money on mutual funds that end up underperforming the market over the long term, as documented by product performance statistics. Especially since there is a risk that the instrument on which one begins to accumulate is closed or merged with other instruments of the same nature.
- Carefully select accumulation instruments: this foresight is of paramount importance to make the most of the compound interest effect, which drives 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 all levels: sectoral, monetary, geographical.
- Set purchase frequency of tools: it is important to obtain a fair compromise between the frequency and the impact of the commission. A threshold that could help in choosing the right periodicity could be to set the payout so that the impact of the commission does not exceed 0.2% of the transaction.
- Choose tools that use physical index replication: in this way the financial instruments in which you invest are physically held and you are less exposed to counterparty risk (present in the replica swap). Prefer very liquid instruments (AUM) and traded on the main stock exchanges (adequate trading volumes).
- Do not accumulate on instruments hedged by the exchange risk (EUR – hedged): in the long term, the currency market tends towards equilibrium; moreover, if a good currency diversification has been achieved, the fluctuations of the instruments invested in the different currencies compensate each other.
Choose Pac or Pic? This may be the dilemma
Investors are often faced with the dilemma: Peak or Pac? The PAC opposes the investment strategy PIC (capital investment plan). Indeed, through the Peak you choose, having an initial capital available, to invest the totality of the sum in only one moment. It goes without saying that it raises two types of questions: on the one hand the need to have the initial capital, on the other hand the fact that it presents a higher volatility than PAC.
The PAC, on the other hand, is suitable for those who do not have an initial capital to start investing and allows better control of the emotions caused by market trends and to obtain positive returns in various market conditions: In a bullish market, the PAC and the PIC return positive returns to the investor, but the same does not necessarily happen in a sideways condition of the markets.