Drawdown is the percentage drop from a peak to a trough. It hurts not only financially, but psychologically — and the deeper the drawdown, the harder the recovery.
Losses are nonlinear: a 50% drop needs a 100% gain to break even.
Large drawdowns lock capital and attention, forcing bad decisions under stress.
Deep losses create regret and panic selling, often near the worst point.
The key is to size and diversify so that your worst-case drawdown is something you can survive emotionally. If the loss forces you to abandon your plan, the risk was too high — regardless of the long-term return.
No. Drawdown is the drop in account value from a peak to a trough. It includes unrealized losses even if you haven’t sold.
Because recovery is based on the smaller base after the drop. From 100 to 75 needs +25, which is 25/75 = 33.3%.
No. It’s a self‑check for how you might behave under stress. Selling is a separate rule you decide.
Usually recoverable quickly, but frequent dips can still erode confidence.
Still manageable, but recovery starts to feel meaningful.
Common in equity markets. Requires patience and a plan to avoid emotional exits.
Recovery can take years. Behavioral risk rises under prolonged stress.
Survivability becomes the priority. Many investors abandon plans before recovery.
Use drawdown limits to set boundaries, then add cycle awareness and rebalancing rules.
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