📉 Drawdowns & Behavior in Crises

🧩 What is a Drawdown?

A drawdown describes the decline of a portfolio from its last peak to its trough. It measures how much a portfolio has fallen in the interim, regardless of its long-term performance.

👉 Drawdown = temporary loss from the peak

Drawdowns are normal, unavoidable, and a natural part of any long-term investment strategy.

🌪️ Why Drawdowns Are Unavoidable

Markets do not move in a straight line. They fluctuate – sometimes violently. Drawdowns are caused by:

• Market stress
• Interest rate changes
• Geopolitical events
• Recessions
• Sector rotations
• Liquidity crunches

Even the best strategies in the world have drawdowns. The difference lies in how well they handle them.

🧠 Psychology: Why Investors Fail During Drawdowns

The biggest danger is not the market – but the emotional reaction to it.

Typical mistakes:

• Panic selling at the bottom
• Changing strategy at the wrong moment
• Overweighting „safe“ assets after the crash
• Re-entering the market too late
• Loss aversion (losses hurt twice as much as gains feel good)

👉 Drawdowns are less a financial risk than a psychological risk.

📊 How Drawdowns Are Measured

Key metrics:

1️⃣ Maximum Drawdown (MDD)

The largest decline ever recorded.

2️⃣ Average Drawdown

Typical declines over many periods.

3️⃣ Recovery Time

How long a portfolio takes to recover from a drawdown.

4️⃣ Volatility

The higher the fluctuations, the more frequent and deeper the drawdowns.

👉 Drawdowns are an objective measure of risk – much more meaningful than pure volatility.

🧱 How Diversification Reduces Drawdowns

Diversification acts like a shock absorber:

• Different asset classes react differently
• Regions do not fluctuate simultaneously
• Sectors have their own cycles
• Strategies complement each other
• Commodities and precious metals stabilize during stress phases

👉 The more independent the building blocks, the shallower the drawdowns.

🔄 How Rebalancing Smooths Drawdowns

Since you have already planned the rebalancing deep dive, here is the short version:

• Rebalancing sells overweights (expensive)
• and buys underweights (cheap)
• This keeps risk stable
• and mathematically reduces drawdowns

👉 Rebalancing is an anti-bubble mechanism.

📉 Historical Examples of Drawdowns

📌 Corona Crash 2020

• Stock markets: –30% to –40%
• Gold: stable to slightly positive
• Commodities: strongly negative
• Diversified portfolios: significantly smaller drawdowns

📌 Interest Rate Turnaround 2022

• Tech: –30% to –50%
• Value: more stable
• Commodities: strongly positive
• Multi-asset strategies: cushioned

📌 Energy Crisis 2022/23

• Europe weak
• USA more stable
• Commodities strong
• Diversification across regions crucial

👉 Drawdowns are normal – but their depth depends heavily on the portfolio structure.

🧭 How Mueckinvest Handles Drawdowns

Your strategies use several protective mechanisms:

• Broad diversification across asset classes
• Quarterly rebalancing
• Rule-based decisions instead of emotions
• No overweighting of individual sectors
• Clear risk budgets
• Umbrella wikifolios for additional smoothing

👉 The goal is not to avoid drawdowns – but to make them more controllable.

🧘 How Investors Can Emotionally Endure Drawdowns

Practical tips:

• Know drawdowns in advance → avoid surprises
• Understand the strategy → build trust
• Don’t check your portfolio daily
• Keep the long-term horizon in mind
• Don’t change strategy during a crisis
• Read regular updates (e.g., your assessments)

👉 Those who endure drawdowns are rewarded in the long run.

📘 Conclusion

Drawdowns are unavoidable – but manageable. With diversification, rebalancing, and clear rules, they can be smoothed, limited, and emotionally endured more easily.

A good portfolio is not one that never falls – but one that falls in a controlled manner and reliably gets back up.