Editor’s Note: The stock market’s extreme volatility this month has a lot of investors wondering what to do. One day the Trump trade wars are on, and the stock market tanks. The next day they’re off, and stocks rebound sharply.

You cannot successfully time this type of market. Nobody knows what to expect, even people that claim to be close to the situation. It has become a guessing game with no right answer in the short term.

However, there is a right answer from a long-term perspective. In fact, increased stock market volatility enhances the financial benefits of a widely known but little used technique that is tailor made for this type of market that anyone can use.

Buy (more) Low, Buy (less) High

A lot of people have been asking me lately if they should get out of the stock market altogether. I can’t blame them. The past few weeks have revealed how fragile the global financial can be when it is treated as a high-stakes poker table.

Even under normal conditions, there is no way of knowing when the stock market has peaked until well after the fact. And by then, usually it has already recovered so it’s too late to take advantage of it.

For that reason, I am reluctant to guess when the stock market has peaked or bottomed out. However, you don’t need to know that in order to profit from its ups and downs.

Instead, you can dollar-cost average (DCA) to take advantage of vacillating stock prices. It works like this:

• First, specify the amount of money you can commit to new investments.
• Second, select a time horizon over which that money will be invested.
• Third, identify an investment portfolio into which that money will be transferred on a periodic basis over your chosen time horizon.

Once you have made those decisions, your broker can do the rest for you. At that point, all you must do is sit back and let the mechanics of DCA work in your favor.

Simple Math

The math works like this. During periods when stock prices are high, your periodic purchase will buy fewer shares. When stock prices are low, that same dollar amount will buy more shares. Over time, your average cost per share purchased should be lower than the average share price over the entire period.

Let’s look at an example. You have $6,000 to invest over the next six months. On the same day each month, $1,000 will be transferred from your money market account into a mutual fund. During the first three months, the fund’s share price drops by a dollar each month. Then, it bottoms out and rises by a dollar each month.

At the end of six months, the fund’s share price is right back to where it started. Had you simply invested all $6,000 at the beginning, your account value would be unchanged. However, under the DCA plan your account value would be worth $6,722 for an immediate gain of 12% as shown below.

Of course, a DCA plan only works in your favor if the investment bottoms out at some point during the investment period. If it does not, you would still have a net loss. For that reason, it is critical that the DCA investment period be long enough to allow time for the market to recover.

Most DCA plans run for 6 or 12 months. If you are expecting a big drop soon, then a 6-month plan may be preferable. But if you are concerned that the stock market may bounce around for a while, a 12-month plan might be the safer play.

Either way, once the DCA plan is in place you should sleep more soundly at night. You will view the stock market’s huge drops as working in your favor, driving down your average cost per share.

Automatic Investments

If you are an active participant in a 401k plan, you have been dollar-cost averaging all along. Every pay period, the funds in your portfolio are purchased at the current share price. If you are not yet participating in your employer’s 401k plan, now should be a good time to get started.

If you do not have access to a 401k plan, you can still benefit from dollar-cost averaging by setting up a Systematic Investment Plan (SIP) with your broker for your IRA and other personal investment accounts. The process is essentially the same, although the money will not be directly transferred from your pay. Instead, you will first need to deposit the money into your brokerage account.

If you are already fully invested, you can still use the stock market’s volatility to your advantage by rebalancing your portfolio periodically. That way, you should benefit when money rotates out of whatever has been in favor and into cheaper stocks. Either way, you win in the long run.