Perspectives · Risk · 2026

Drawdowns: why losses are harder to recover than they look

A drawdown is the fall from a peak to a low. The arithmetic is unforgiving: a 10% fall needs an 11% gain to recover, a 25% fall needs 33%, and a 50% fall needs 100%.

That is why risk is better thought about as the size and the length of the falls you could live with, not just as volatility. The 2020 crash was the fastest bear market in history, and markets recovered quickly. The year 2022 was different: stocks and bonds fell together in a slower grind lower that took longer to repair.

The question to ask of any investment is not only what it might earn, but what you would do if it fell by a third. If the honest answer is sell, the investment is too large or too risky for you.

Time horizon matters too. The same fall is a nuisance to someone who will not need the money for ten years, and a serious problem to someone who needs it next year.

General information only; not investment advice. Read the risk warning.