Drawdowns Explained: Surviving the Downturns

A drawdown is the peak-to-trough fall in the value of an investment or portfolio, measured as a percentage. It matters because the maths of recovery is unforgiving — a 50% fall needs a 100% gain to break even — and because the real danger is not the fall itself but being forced, or frightened, into selling at the bottom. Surviving drawdowns is mostly about preparation and temperament.

Where this fits: surviving downturns is the practical application of survival-first investing and a long time horizon. It is the moment your position sizing and understanding of real risk are tested.

Every investor, without exception, will live through drawdowns. The question is never whether — it is how you will behave when they come. And since behaviour in a crisis is largely determined by preparation before it, the work of surviving a downturn is mostly done in the calm beforehand.

Let us demystify drawdowns completely: what they are, why the recovery maths is so brutal, why they are unavoidable, and — most importantly — how to come through them with your capital and your composure intact.

What a drawdown is

A drawdown is simply the decline from a previous high point to the lowest point that follows, expressed as a percentage.

If a portfolio rises to £100,000 and then falls to £70,000 before recovering, it suffered a 30% drawdown. The figure is measured from the peak, not from where you bought — which is why even a profitable position can be “in drawdown” if it has pulled back from a recent high.

Two related terms are worth knowing:

• Maximum drawdown — the largest peak-to-trough fall over a given period. It is a measure of the worst pain an investment inflicted along the way.
• Recovery period — how long it took to climb back to the previous peak. A drawdown is not over when the fall stops; it is over when you are made whole again.

Drawdown is a far more honest description of risk than a tidy statistic like beta. It tells you, in plain money terms, how much you would have had to endure.

The brutal maths of recovery

Here is the single most important thing to understand about drawdowns, and it is not intuitive: losses and the gains needed to recover them are not symmetrical.

When you lose a percentage of your money, you have a smaller base to recover from, so the gain required to get back to even is larger than the loss.

Drawdown (loss)	Gain needed to recover
-10%	+11%
-20%	+25%
-33%	+50%
-50%	+100%
-75%	+300%
-90%	+900%

Study that table until it unsettles you, because it should. A 50% loss does not need a 50% gain to recover — it needs a doubling. A 90% loss needs a tenfold gain. This asymmetry is why avoiding large, permanent losses matters more than chasing large gains. It is the mathematical heart of survival-first investing.

Note the word permanent. If a quality business you own falls 50% in a market panic but the business itself is intact, the recovery maths works for you over time as the price reverts to value. The table becomes lethal only when the loss is permanent — when you sell at the bottom, or when the underlying business is genuinely impaired. More on that distinction below.

Why drawdowns are inevitable

Some investors quietly believe that with enough cleverness they can avoid downturns entirely. They cannot, and believing otherwise is dangerous because it leads to disappointment and panic when the inevitable arrives.

Broad stock markets have, throughout their history, repeatedly suffered significant declines — falls of 20% or more have occurred many times, and deeper falls of 30%, 40%, and 50%-plus have happened in severe episodes. This is not a flaw in the system; it is the system. Markets are driven in the short term by human emotion, and human emotion swings between greed and fear. Those swings produce drawdowns as surely as weather produces storms.

Accepting this changes how you invest. You stop treating downturns as freak events to be dodged and start treating them as a recurring feature to be prepared for — and, for the prepared, a recurring opportunity. We cover the opportunity side in how to use short-term price movements to your advantage.

The real danger: self-inflicted permanent loss

Here is the crucial reframing. A drawdown, by itself, is a paper loss. The value has fallen, but you have lost nothing permanently until you act. Markets have, historically, gone on to recover and reach new highs after even severe declines — though past recoveries never guarantee future ones.

The permanent damage is almost always self-inflicted, in one of two ways:

1. You panic-sell at or near the bottom. Fear convinces you the fall will never end, you sell to stop the pain, and you convert a temporary paper loss into a real, locked-in one. Worse, you are then out of the market and tend to miss the recovery, which often comes sharply and without warning.
2. You are a forced seller. You needed the money — for living expenses, a margin call, a debt — and had to sell into the decline regardless of your wishes. The market does not care about your timing.

Both failures are avoidable, and avoiding them is what “surviving drawdowns” really means. The downturn is not your enemy. Your own behaviour, and poor preparation, are.

How to survive drawdowns: the preparation

You cannot control when a drawdown comes or how deep it goes. You can control everything that determines whether you survive it well. All of this must be done before the storm, because judgement in a crisis is poor.

1. Keep a genuinely long time horizon

Only invest in the stock market money you will not need for many years. If your horizon is long, a multi-year drawdown is something you can simply wait out. If it is short, you have no business being fully invested in stocks. A long time horizon is the single greatest advantage an individual investor has — but only if you actually have one.

2. Hold a cash buffer

Cash is the antidote to forced selling. If you have a reserve for living expenses and emergencies outside your portfolio, you are never compelled to sell stocks at the worst moment. Cash also gives you the means to buy when prices are cheap — turning others’ panic into your opportunity. It falls with nothing and lets you act; it is the most reliable diversifier there is.

3. Size positions so no single holding can ruin you

If one holding is 60% of your wealth and it halves in a crisis, you are in serious trouble and far more likely to panic. Sensible position sizing and diversification mean that even a brutal fall in one or two holdings is survivable, which keeps you calm enough to hold.

4. Own only businesses you understand and believe in

The investor most likely to panic is the one who does not really know what they own. If you bought on a tip or a chart, a 40% fall is terrifying — you have no anchor. If you bought a great business after thorough research against the Five Criteria, you can look at a falling price and think, calmly, the business is fine; the price is on sale. Conviction born of understanding is what holds you steady.

5. Have a written plan before the storm

Decide in advance what you will do in a downturn: that you will not sell quality holdings into a panic, that you will deploy your cash buffer in stages as prices fall, which businesses on your watchlist you would buy and at what prices. A plan written in calm is worth a hundred decisions made in fear.

Distinguishing a drawdown from a real impairment

One honest caveat, so this is not read as “never sell in a downturn.” Not every fall is a temporary paper loss. Sometimes a business genuinely deteriorates, and the market is right to mark it down. The discipline is to tell the difference:

• A drawdown to ride out: the business is intact, the moat holds, the balance sheet is sound — only the price has fallen, usually because the whole market fell.
• A real impairment to act on: the moat is breaking, the balance sheet is cracking, the thesis has broken. Here, selling can be the right decision — see when to sell a stock.

The point is that you decide based on the business, not the price. Price alone is not information about whether to sell. The fact that something has fallen is never, by itself, a reason to sell it.

A hypothetical to make it real

This is a hypothetical for illustration only. Imagine two investors entering a 40% market decline. Investor A put every spare pound into stocks, owns five names she bought on momentum, and has no cash reserve. As the fall deepens, fear takes over; needing to feel safe, she sells near the bottom, locking in the 40% loss. The market later recovers, but she is out, and her loss is permanent.

Investor B owns a dozen businesses he researched carefully, each sized so none can sink him, and holds a cash buffer outside the portfolio. The same fall is uncomfortable, but his businesses are fine, so he holds — and deploys his cash in stages into the best names on his watchlist. When the market recovers, he is whole again and better off for having bought cheaply. Same market, opposite outcomes — and the difference was all in the preparation, not the forecasting.

Frequently Asked Questions

What is a good maximum drawdown? There is no single number — it depends on your portfolio and temperament. What matters more is whether you can withstand the drawdown without being forced or frightened into selling. A portfolio you can hold through a 40% fall is worth more to you than one that looks better on paper but shakes you out at the bottom.

How long do drawdowns last? It varies enormously. Some market declines recover within months; severe ones have taken years to return to the previous peak. The uncertainty is precisely why you should never invest money you will need in the near term in the stock market.

Should I sell to avoid a drawdown? Trying to sell before declines and buy back before recoveries — market timing — is extraordinarily hard to do consistently, and getting it wrong is costly. For a long-term investor holding quality businesses, riding through drawdowns is usually the better path than attempting to dodge them.

How do I avoid panic-selling in a crash? Prepare before the storm: hold only businesses you understand and believe in, size positions so no single one can ruin you, keep a cash buffer so you are never a forced seller, and have a written plan. Decisions made calmly in advance are far better than ones made in fear.

Is a drawdown the same as a loss? Not necessarily. A drawdown is a fall from a peak — a paper decline. It becomes a realised loss only if you sell, or a permanent loss if the underlying business is genuinely impaired. For quality holdings in a broad panic, a drawdown is usually temporary.

Your Next Step

Build the resilience before you need it:

• Internalise the recovery maths in survival first: the math of staying in the game.
• Use your horizon as the advantage it is in why a long time horizon is your biggest advantage.
• Turn falling prices into opportunity with how to use short-term price movements to your advantage.
• Prepare your buy list with how to build and use a stock watchlist.

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About the author: Cameron Hayes is a senior investor relations and finance professional who has worked in IR at Nasdaq Copenhagen-listed companies including Nilfisk and Maersk Drilling. He holds an MSc from Copenhagen Business School and a BCom from the University of Ottawa, and founded Gingernomics to teach individual investors the Five Criteria framework. More about Gingernomics.

The content on Gingernomics is for educational and informational purposes only and does not constitute financial advice. Always do your own research and consult a licensed financial advisor before making any investment decisions. Past performance is not indicative of future results.