When to DCA
Whenever you receive regular payments, such as a check for work, you should invest a percentage. A 401(k) makes this process easy. If you are already maximizing your 401(k) or do not have access to a 401(k), make sure that you set aside a percentage of your check to invest in something that will grow in value. Ignore the fact that the stock market may have crashed or gone therough the roof, the important thing is to invest that money immediately, regularly, and in constant or increasing amounts.
This eliminates the desire and need to "time the market", or get in and out at the top and bottom. The mantra "buy low, sell high" is correct, but because nobody can forecast the marketplace, it is impossible and ultimately futile for all but the most sophisticated investors. It is more easy to invest regularly and mitigate the risk of getting in at the wrong time than it is to put all your money in at one time or invest irregularly and regret missing out on a market gain or chasing returns (investing in an asset that recently increased in value). Make sure that your regular investments are diversified among multiple assets such as stocks, bonds, mutual funds, and CDs.
Dollar-cost averaging may be easier to visualize (see chart). Picture the ebbs and flows of the value of the stock market, then picture your regular investments at various values. The average of those values will be between the high price (where you would ideally want to sell) and low price (where you would ideally like to buy). In this way DCA is a compromise to maximize your returns while mitigating risk.
When not to DCA
If you inherit a lump sum of money through work, accident, family, lottery, or other means you should invest all of it immediately. Money devalues over time, and you want to make sure that you capture all possible gains as soon as possible to gain the benefits of compounding (the more money you make, the more interest you earn, compounding the effect). As long as you diversify the investment over multiple types of products according to your risk tolerance - such as equity funds, bond funds, and international funds - the risk of investing at the wrong time is somewhat mitigated. The risk of your principal (your original investable total) depreciating is much greater than the risk of it devaluing across multiple investments. If you're concerned, consider a balanced or target-date fund as a one-stop shopping investment and plug the entire investment in.
Inaction is the worst possible decision
Investors often get caught in the headlights deciding among the millions of investments out there and knowing that their investment may lose value. However, not investing guarantees that your assets will either depreciate in value by sitting under your mattress or fail to keep pace with inflation in a bank account. Bank accounts almost never outpace inflation, and you need to invest. If you are still scared, speak with a financial advisor.
Next issue: Selecting an investment service and/or financial advisor