Question 1

What is a portfolio drawdown?

Accepted Answer

The percentage decline from a portfolio's peak to its subsequent trough. Your account hits $1,000,000 and then falls to $700,000. That is a 30% drawdown. Drawdowns are the most honest measure of downside risk because they describe the actual worst experience you lived through, not the smoothed-out long-run average that the marketing brochures run on. Long-run average returns are a story told by survivors. Drawdowns are the story you experience in real time. Every investment decision you make, whether to contribute, whether to rebalance, whether to sell at 2 AM because you cannot sleep, is made under the psychology of the drawdown, not the compound annual growth rate.

Question 2

How do bonds actually perform during a recession?

Accepted Answer

In a classic recession where the Fed cuts rates to support the economy, high-quality Treasuries and investment-grade bonds rally. Yields fall, prices rise, and money flees equities toward safety. That is the textbook playbook, and it worked in 2008 and 2020. The Bloomberg U.S. Aggregate posted positive returns both years while stocks collapsed. 2022 was the exception that people are still getting over. Bonds and stocks both fell because the recession fear was inflation-driven, the Fed was hiking instead of cutting, and the classic diversification trade stopped working. Bonds reliably offset stocks when the shock is about growth. Not when it is about inflation. That distinction is what ruined the 60/40 portfolio for a year.

Question 3

What is a 60/40 portfolio?

Accepted Answer

60% stocks, 40% investment-grade bonds. The default allocation for moderately conservative investors for about fifty years. It captures most of the long-term equity return while letting bonds cushion the worst drawdowns, usually. Historical nominal return is around 8% a year. Worst-recession drawdowns have run 25% to 32%, which sounds terrible until you compare it to the 49% to 57% drawdowns an all-stock portfolio experienced over the same episodes. The case for 60/40 is not that it is the best portfolio. It is that it is the portfolio a human can actually hold through a bear market without doing something stupid.

Question 4

How long do recessions typically last?

Accepted Answer

The NBER business-cycle dating committee is the official arbiter, and according to their reading the average post-WWII U.S. recession lasted about 10 months peak to trough. 2020 was 2 months, the shortest on record. 2008 was 18 months, the longest since the Great Depression. Those are the bookends. One important wrinkle: recession length is not the same as market drawdown length. Markets usually start selling off before the recession is officially underway and start rallying before it officially ends. By the time NBER declares the recession over, stocks have often made back most of what they lost. By the time NBER declares it started, you have already been bleeding for months.

Question 5

How can I protect a portfolio before the next recession?

Accepted Answer

Recession-proofing is mostly about allocation, not timing. Tilt toward investment-grade bonds. Hold a cash buffer sized to at least twelve months of essential spending, so you never have to sell in a drawdown to pay rent. Diversify broadly within your equity allocation instead of concentrating in one stock or one sector. International diversification helps at the margins. It does not save you during a global panic because global markets correlate in panics by definition. The most important defense is behavioral. Drawdowns are temporary for diversified portfolios. Selling during a bear market is how you turn a paper loss into a permanent one.

How much would you actually lose?

Balance and allocation

All three, side by side.

Recessions, decoded.

Retirement Drawdown

FDIC Coverage