The Psychology of Watching Your Portfolio Drop 60 Percent

I have been through four of these. They are similar enough that the sequence is worth writing down, because knowing what month you are in makes the month easier.

Month one: this is normal

The first thirty percent produces almost no distress, because you have read that this happens. You have a number in your head for how bad it gets. You are still inside it.

You may even add, on the grounds that this is what you said you would do.

Month two: the arguments arrive

The second leg down comes with a story. It always does. There is a regulatory action, or a failure at a large firm, or a macro event, and it is always something real rather than something invented.

This is the point at which the decline stops feeling like volatility and starts feeling like information. That shift is the dangerous one, because it is sometimes correct.

Month three: the reasoning turns

Here is the part that took me three cycles to notice. Around month three, I stop defending the position and start looking for reasons to exit that will sound respectable.

The sentences are all responsible-sounding. Reassessing risk. Reducing exposure. Taking some off the table. Managing position size. Every one of them is a legitimate thing to do and every one of them, in month three, is a rationalisation of the desire for the feeling to stop.

The tell is that none of them were on my mind in month zero.

Month four to eight: flatness

The decline slows. Nothing recovers. Coverage disappears entirely, which is its own kind of pressure, because the absence of any discussion suggests the thing has been settled.

This is the longest part and the least dramatic. It is also, in every cycle I have seen, where the people who eventually did well were quietly doing nothing.

Month nine onward: forgetting

At some point you stop checking. Not from discipline. From fatigue. The position becomes a fact about your life rather than an event in it.

That is the state you were trying to reach the whole time.

Which of the arguments to listen to

Not all drawdown reasoning is rationalisation. Some of it is the market telling you something true. Two tests have helped me separate them.

Would this argument have changed my mind at the peak? If the concern is one I would have dismissed when the price was high, then I am not responding to the argument. I am responding to the price.

Is this new information or new salience? The risks of holding a volatile asset were fully known in month zero. A decline does not add risk; it makes existing risk vivid. If nothing about the asset has changed, then what changed is me.

The cases that survive both tests are real. A protocol with an unfixed exploit, a custodian that has stopped honouring withdrawals, a regulatory change that makes the asset unholdable for your situation. Those are reasons. The feeling of the number being lower is not.

What I do now

Position sizes are set in calm periods and written down. Rebalancing happens on a schedule, not on a chart. I keep a small working balance on a platform I can leave a standing order on and the rest somewhere inconvenient.

And I reread my notes from month three of the last cycle, which contain a completely convincing argument for selling everything at what turned out to be close to the low.

That document is the single most useful thing I own.