The PAC reassures investors, but it is not always in their best interests
People like the PAC because it offers peace of mind – there’s no getting round that. But a regular savings plan isn’t always the alternative to a one-off investment. It is often the only way into the market for those who do not have capital to hand but wish to build it up over time. In this case, there is no lump sum sitting idle waiting to be invested: the money is put in bit by bit. It’s a different matter, however, if the capital is already in the account and you still choose to spread the investment. In this case, however, a PAC should not automatically be regarded as synonymous with prudence, because being prudent does not mean postponing the investment, but rather choosing an appropriate level of risk, diversifying, keeping costs down and having a suitable time horizon. During a prolonged period of rising markets, for example, investing gradually means foregoing part of the return.
Capital that is waiting its turn remains idle whilst the markets rise. And this is the cost of a gradual approach, which is particularly onerous when the investment horizon is long and the portfolio is heavily exposed to equities. Of course, a PACE reduces the risk of investing everything on the wrong day, but it introduces another risk: entering the market too slowly on the right day. And since no one knows in advance which of the two scenarios will occur, viewing a gradual approach as the safer option can be misleading.
Furthermore, paying in instalments can reinforce the mistake of having chosen the wrong product – one that may be expensive, poorly diversified or unsuitable for one’s profile: the regularity of the payments dulls one’s attention because the instalment is deducted automatically each month; the plan continues, and the saver stops asking themselves what they are actually buying, how much they are paying, and whether that investment is still in line with their objectives. Automatic payments are useful if they help you to be consistent, not if they become a reason to lose interest in the investment. In short, even a regular savings plan needs to be managed and monitored, because needs can change over time. The monthly instalment must not, therefore, become an ‘autopilot’.
The power of the PAC, on the other hand, becomes apparent when it is used as a tool for self-discipline. Setting a fixed amount to invest each month in advance means removing the temptation to spend it and starting to put a concrete financial plan in place. It is a simple mechanism, but precisely for this reason it is effective for those who struggle to set aside significant sums or tend to put off the decision to invest.
In this case, comparing it with the PIC becomes meaningless because the real choice is not between investing everything straight away or in instalments, but between investing at all or not investing at all. And this is where the PAC wins the challenge – perhaps the most difficult one: managing to turn savings into investments.
