I have money that I need in a short amount of time. Should I invest?

 Investing in the stock market is for the long term. With a long time horizon, equities give the best possible return; however, in shorter time periods (such as a few months to a few years), there can be significant volatility in the stock market. What this means is that if you may need to liquidate your investments in a year or less, its a better option to put the money in a savings account; with equity investments, the returns in such short time periods can sometimes be negative, and you may end up short of funds.

 

Should I invest a lump sum all at once, or employ a dollar cost averaging strategy?

There are two alternative strategies for investing in equity - lump sum investing (as soon as funds are available) versus dollar cost averaging (DCA). DCA lets you invest a fixed amount every month or every quarter, reducing risk by averaging the cost of your total investment over multiple months or quarters. Among these two strategies, lump sum investing has been seen to be more financially optimal compared to DCA, because available funds are invested sooner and have a longer time period in which to reap returns, in comparison to DCA.

 Investors who handle LSI or DCA should understand that they can underperform or even lose money in any given period, and accept those risks before executing either strategy. Historical averages are useful for long-term analysis, but are poor predictors of short-term performance. With either method it is usually better for the investor to periodically re-evaluate the target asset allocation to ensure that it addresses risk tolerance levels and investing goals.