If You Don't Have A Long-Term Plan, Buying The Dips Can Be Fatal

Former U.S. President Barack Obama has once again demonstrated that Uncle Sugar will protect investors against their misplaced greed.

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The Federal Reserve, the Treasury Department, and the Federal Deposit Insurance Corporation joined forces after Silicon Valley Bank and Signature Bank all but imploded to protect the stock market from another systemic financial collapse.

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The volatility of the market will never go away. The gyrations of this past week are evidence of that. It is very important for long-term investors to celebrate that fact, especially now that the government is responsible for reducing market risks.

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Due to Uncle Sugar's many rescues since 2000, it is logical to conclude that not embracing risk is the greatest investment risk. We use the term in its most generous sense to describe legions of investors who took action as stock prices plummeted and bond rates exhibited extraordinary volatility.

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A hard-hit regional-bank sector saw a lot of buying and trading of stocks and call-and-put options by people with no special knowledge of investing, economics, and markets. Investors initially benefited from the government's pledge: Many stocks rose when the news broke.

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Zero-dated options are ones that expire in one day, so anyone who has traded them has probably benefited handsomely. It is not relevant at this point that zero-dated options resemble lower Manhattan bucket shops prior to the 1929 crash. In the past, as now, too many people bet on momentum patterns predicting stock price movements.

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The market and short-term greed should be left to others to moralize about. The greatest risk investors face is buying the dip at any cost, so let's focus on that instead.

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Since Uncle Sugar de-risked every financial crisis for more than two decades, the market mob has become conditioned to believe that investors can make money on every dip. It will eventually prove disastrous to place so much faith in such a misplaced belief.

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How should we proceed? Develop a disciplined investment approach. Consider reviewing your portfolio and reducing risk to a minimum. Are you able to sleep well at night? You may want to consider speculative positions if this is not the case.

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A long-term investor may consider an investment strategy we've called "time arbitrage." In time arbitrage, puts and calls are sold and blue-chip stocks are purchased that can be warehoused for at least three to five years.

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It is common for options prices to rise during broad market fluctuations due to fear or greed premiums. Discretionary, long-term investors can take advantage of chaos and volatility as a result of this reflexive reaction.

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Volatility, or VIX, has spiked higher on the Cboe Volatility IndexVIX –8.45%. S&P 500 OptionsSPX +1.54% is now elevated, along with their component stocks. Stocks can be bought at a discount for investors who are willing to take a risk.

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Investors should stop acting like they have intimate knowledge of the stock market, which is unknowable, as we suggested in early February. In terms of dividends, a handful of blue-chip stocks are better known. It is often possible to keep such stocks for a very long time.

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The events of Uncle Sugar's life will eventually overwhelm him, or he will have an OBE. A dip buyer's dream will come to an end if that happens.

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There is no way to predict when this might happen, but it happens. There is an extreme level of volatility in the bond market at the moment. Economists are unable to predict whether the economy will land softly or hard. Everyone should be nervous when they hear that.

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Chaos and risk can be countered by what? Self-discipline.