Drawdowns and the Math of Recovery
Why losses and gains aren't symmetrical, how much it takes to recover from a fall of any size, and how long the biggest US stock market declines took to recover.
The short version
A drawdown is a fall from a previous high. Recovering takes a bigger percentage gain than the loss itself, because the gain starts from a smaller base: a 20% loss needs a 25% gain, a 50% loss needs 100%, and a 90% loss needs 900%. In US data since 1928, major stock market declines took between two and eight years from the start of the fall to full recovery. A mix of stocks and bonds fell less and usually recovered sooner. Avoiding very large losses matters more than chasing large gains.
By the end of this lesson, you'll be able to
- Calculate the gain needed to recover from a loss of any size
- Describe the depth and length of major US stock market declines since 1928
- Explain why limiting large losses matters so much for long-run results
Why this matters
Part 1 showed briefly that a 20% fall needs a 25% gain to get back to even. That asymmetry gets dramatic for bigger losses, and it explains much of portfolio risk management: the deeper a hole, the disproportionately harder it is to climb out. This lesson works through the math and then looks at how long real declines have lasted.
The asymmetry
A Drawdown. The fall in value from a peak to a later low, usually shown as a percentage. The largest one over a period is called the maximum drawdown. Glossary is a fall from a previous high. The gain needed to recover is calculated from the lower value, which is why it's always bigger than the loss.
| Loss | $10,000 becomes | Gain needed to get back to $10,000 |
|---|---|---|
| 10% | $9,000 | 11.1% |
| 20% | $8,000 | 25% |
| 33% | $6,700 | 50% |
| 50% | $5,000 | 100% |
| 75% | $2,500 | 300% |
| 90% | $1,000 | 900% |
The formula: gain needed = loss ÷ (1 − loss). For a 50% loss: 0.5 ÷ 0.5 = 1, or 100%.
Small and moderate losses are quite recoverable. Very large ones are a different kind of problem: an investment down 90% has to multiply tenfold just to break even. That's why the biggest danger in investing isn't an ordinary bad year. It's the kind of loss, from concentration, leverage, or a failed business, that's too deep to come back from.
The rest of this lesson is for members
Still to come in this lesson: How long real declines took, What this means for a portfolio, the key takeaways, and 2 quiz questions with explanations.
Membership opens every lesson in the curriculum, the capstone projects, the interactive tools, and the members-only channels in the Hyperion Entities Discord. The first lesson of every module stays free.
Go deeper
- Sharpe, Sortino, and Maximum DrawdownPortfolio Theory and Risk (depth track)
- The 1929 Crash and the Great Depression coming soonLessons from Market History (depth track)
- The 2008 Financial Crisis coming soonLessons from Market History (depth track)
Notes and sources
- Aswath Damodaran, NYU Stern School of Business. Historical Returns on Stocks, Bonds and Bills, with annual data through 2025 (updated January 2026). Checked 2026-10-12.