While the jury is still out there on buying the dip, Nick Maggiulli explains why buying the dip—especially during recession—might not be possible for everyone.
If we assume that the market will eventually recover, then a decline in equity prices today allows young and “asset-light” investors to buy cheaper today and earn higher returns in the future.
But the problem with this logic is that all else isn’t equal. Market crashes don’t happen in a vacuum. When asset prices decline, economic consequences typically follow. Workers lose their jobs or don’t get promoted. Hiring freezes up. People stop spending as much money. And this negative cycle feeds on itself.
If you happen to be someone who keeps their high-paying job during such a time, then, yes, a market decline can be a buying opportunity. But this isn’t the case for everyone. In fact, the paper The Short- and Long-Term Career Effects of Graduating in a Recession suggests that those who start their career during a recession tend to see 5% lower lifetime earnings. As the authors state:
A typical recession—a rise in unemployment rates by 5 percentage points in our context—implies an initial loss in earnings of about 9 percent that halves within 5 years, and finally fades to 0 by 10 years. For this time period, these reductions add up to a loss of about 5 percent of cumulated earnings.
I know what you might be thinking: “Yes, I lose 5% of my lifetime earnings, but I get to buy stocks at a 20%+ discount. How is that not a huge win?”
There are a few problems with this thinking, each of which I will address in turn.