Why this matters for beginners
Most long-term return is destroyed by panic selling near the bottom, not by picking the wrong stock.
Main explanation
A drawdown is the drop from a recent peak. Broad markets have historically experienced -20% drawdowns multiple times per decade, and occasional -40% to -50% events.
Drawdowns feel much worse than they look on a chart, because they unfold over weeks or months while every headline sounds alarming.
Selling during a drawdown locks in the loss and removes you from any future recovery. Historically, the strongest rebound days often cluster near the worst days.
The practical defenses are decided in advance: an emergency fund, a time horizon that matches your investments, position sizes you can stomach, and a plan you wrote down before the storm.
Example using a real company
Not a company-specific lesson. Think about how the S&P 500 felt in March 2020, October 2022, or other historical drops, and what the long-term chart looked like a few years later.
- →An investor who sold during the 2020 crash and stayed in cash missed a sharp recovery in the months after.
- →An investor who kept buying their regular monthly amount through 2022 lowered their average cost without trying to time anything.
Common beginner mistakes
- ✕Selling everything after a big drop because of fear.
- ✕Checking the portfolio every hour during a downturn.
- ✕Switching strategies mid-drawdown based on news.
Key terms
- Drawdown
- The decline from a recent portfolio or market peak.
- Recovery
- The period after a drawdown when prices return toward the prior peak.
- Bear market
- A sustained decline of roughly 20% or more from a recent high.
Key takeaways
- 01Drawdowns are normal, not a sign something is broken.
- 02Selling near the bottom is the most common way to destroy long-term returns.
- 03The defenses are built before the drawdown, not during it.
Check yourself
- 01Selling during a drawdown always protects you from further losses.
- 02Drawdowns of 20%+ have happened many times historically.
Try the concept on a real company
Open a broad ETF in the Analyzer and read its risk and volatility context. That's the kind of behavior you need to be mentally prepared for as a long-term investor.
Educational examples only. Not buy or sell recommendations.