How can you avoid getting into the market when it is too late – committing at the peak, right before the speculative bubble bursts?  The risk is always there, especially in this atmosphere of breaking records – who knows if we are at a top?  Dollar cost averaging is one method to invest when volatility is a factor.  Dollar cost averaging is a method to invest where you don't have to risk everything on near term timing.  With dollar cost averaging you invest a portion of your allocation consistently over a period of time.  It is common to dollar cost average an amount into an investment on a monthly basis.

Benefit of dollar cost averaging: When you dollar cost average your money into an investment, the average price you pay is usually better than the average price you would get if you were to invest it all at once as a lump sum.  Also, when you dollar cost average, your price would be better whether the market increases or declines.  This is because you are investing a fixed amount each time over a period.

For example, let’s say you have $10,000 to invest into a volatile stock.  Rather than risking the chance of making a crucial mistake in timing by purchasing as many shares as you can with your ten grand when you think the price is at a low (as a balloon transaction).  You instead invest $1,000 each day for two weeks.  If the stock price swings up and down during those two weeks, that $1,000 will end up buying both at a high price and a low price.  But, notice that when the stock is low, $1,000 buys more shares.  When the price is high it buys less shares.  This causes the average price per share purchased to be lower than the average price of the stock over that trading period.  Neat stuff!  Sure, there are exceptions and dollar cost averaging does not always work when rear view mirror investing but chances are, as a rule of thumb, this method will work for you when you want to invest in a volitile stock for the long term.