If you’ve got a lump sum to invest chances are you aren’t complaining, but it can be stressful when taking the plunge and putting all of that money into an investment. Perhaps you got the money from an inheritance, a lottery or gambling win, or you’ve accumulated it from years of hard work and scrimping and saving. Regardless of how you obtained the money, your fear is that you don’t want to do anything stupid with it and have nothing to show for it.
That stress can magnify if you originally put the money into a CD and now it has matured and it’s time for you to make a decision of where it will go. If your funds are in a money market account or a savings account you may have the feeling like it’s just wasting away. You know all of the old adages of making your money work hard for you, and using money to make money and you finally want to get in on the action. If you’ve been waiting years and years to have this sort of cash on hand and the day has finally come, you will be anxious to get started. Harness that excitement and take a breath.
You don’t ever want to rush into an investment decision, especially with a larger amount of money. Relax for a bit and consider all of your options. if you are a bit skittish about putting all of your money into an investment at once you should consider the process of dollar-cost averaging or DCA for short. With DCA you’ll be investing your funds in equal amounts on a consistent basis, like once a month, into a group of diversified investments.
Let’s say you have 50,000 to invest. You could set it up so that $2000 every month goes into investments. At that rate it will take a few years. The money that is on deck to be investing isn’t just lying around doing nothing. Keep it ready in a money market account so it is gaining some interest while it waits. Even though you may see this as a waste of time, it’s all part of your strategy.
The reason you might consider DCA is that it lets you slowly and steadily head into riskier investments. If you go “all in” on an investment that doesn’t work out the way you thought it would, you’ll be left with nothing. If you slowly test that investment out, and it is going well, you’ll be able to keep steadily investing in it. If it’s not working out, you can divert your funds to a different vehicle without losing the farm. To keep the poker reference going, it’d be called slow playing the hand.