Amateur Stock Traders May Underestimate Drawdown Risk

 Markets may be staring down escalating geopolitical tensions, resurgent inflation, and broadening concerns about the disruptive potential of AI, but you’d never know it looking at the S&P 500 Index, which has felt virtually unstoppable as we cross the halfway mark in 2026.  At the end of June, the index was trading just off an all-time high, up 10% through the first six months of the year, after gaining almost 18% in 2025. As portfolio managers, we love to see stocks riding high and clients getting the best of it. But we see ourselves first and foremost as risk managers, and from that perspective we’re always thinking about downside risk: those drawdowns that inevitably rain on the bulls’ parade.

Nobody reading this was invested during the mother of all crashes in 1929, when US stocks fell by over 86%, though I’m sure most of us have cited the Great Depression as an example of tail risk lurking in the distribution of historical stock returns. Of course, it’s one thing to talk about drawdowns like that one; it’s another thing to live through a crash with skin in the game. Investors active today will likely have a vivid memory of the Global Financial Crisis, when the S&P 500 fell by more than 55%. But what about those who only started trading stocks in the last decade?

Source: Rayliant Research, as of Jun. 30, 2026.

To answer such a question, in the graph above, I consider the case of investors who first entered the S&P 500 at different times, inserting those hypothetical investors at five-year intervals and simulating their buy-and-hold performance through June 2026. In particular, I’m focused on drawdowns, and I show each investor cohort’s “worst” drawdown measured in two different ways.

First, I consider the worst drawdown to be the deepest drawdown. An investor in the market since 1980, for example, was around for that GFC market crash, so he has that 55% drawdown under his belt. Another way of thinking about the worst drawdown is in terms of duration: how long did it take for stocks to return to their earlier high-water mark after losses began to rack up? For that investor who started trading in 1980, the longest drawdown was the bursting of the dot-com bubble, which lasted just over six years from peak to full recovery.

Fast forward a little and we find that an investor beginning her market journey in 2005 still experienced the GFC as the deepest drawdown but didn’t suffer through the six years of clawing back, post-internet bubble. In her memory, the GFC drawdown will have been the deepest and the longest, persisting for around four and a half years before the S&P 500 started making new highs. Skip ahead a bit more and an investor entering between 2010 and 2020 was lucky enough to miss the financial crisis but still endured the COVID crash, a 34% drawdown—albeit one that was over in a few months. The longest drawdown for this cohort was the two-year slump around 2022 Fed rate hikes.

This brings us to the last hypothetical group: investors who entered the market—or who only began paying attention to their portfolios—starting in 2025. The biggest drawdown this cohort experienced was a 19% decline amid “Liberation Day” trade-war anxieties, from which stocks fully recovered in just about four months. It’s probably hard for such an investor to imagine the longest drawdown in the full history I’ve depicted, a true bear market suffered against the backdrop of the 1973 oil crisis and economic stagflation, which dragged on for over seven years!

One final point worth considering, now that we’ve seen how memory will naturally differ across investor cohorts, is that there’s something of an asymmetry between the magnitude of the loss suffered in a drawdown and the return required to get back to even. Take, for example, the 2025 group’s 19% drawdown: It took a relatively modest +23% return for stocks to erase their losses. The 55% drawdown sustained amidst the GFC, by contrast, required an astonishing +123% gain to make the affected investors whole. In light of that kind of disparity, it couldn’t hurt for all of us, regardless of when we started investing, to work through some of the math of the market’s history.