Investment losses are asymmetric in percentage terms. Recovering from a large drawdown requires a larger percentage gain than the percentage lost.

The underlying mechanism

An account falling from 100 to 80 has lost 20 percent; returning from 80 to 100 requires a 25 percent gain. From 100 to 50 is a 50 percent loss, and getting back to 100 requires a 100 percent gain before costs.

Compounding describes returns acting on the accumulated balance, including earlier gains and losses. It does not mean money grows smoothly. A 20% fall from USD 100 leaves USD 80; returning to USD 100 then requires a 25% gain on the smaller base.

How to evaluate it in practice

Set loss limits against capital and available liquidity, and model stress scenarios rather than assuming average historical moves describe the worst possible loss. Consider the portfolio, not just isolated trades.

Fees are part of the compounded path. The SEC’s updated 2025 bulletin illustrates how different ongoing fee rates change hypothetical long-term outcomes. Recalculate after inflation and taxes when those are relevant to the investor.

Common mistakes and limits

Using the phrase “I can make it back” as a risk plan ignores increasing recovery difficulty and the possibility of forced liquidation. The math of drawdowns applies even when every trade thesis sounds compelling.

A projected annual return assumes a distribution that markets do not deliver predictably. Sequence of returns, liquidity needs and the possibility of permanent capital loss can matter more than a smooth annualized average.

An exercise for careful readers

Calculate recovery gains after losses of 10, 25 and 40 percent, then compare a policy that limits single-trade exposure with one that does not.

Create two invented paths that have the same simple average annual return but different sequences and withdrawals. Show the ending balance and maximum drawdown. Do not market an arithmetic compound-interest exercise as an investment forecast.

Continue your research

Explore the related topic hub, the risk warning and our editorial standards for additional context. External primary-source references appear below this article.