This year, returns have been heavily concentrated in a handful of AI-linked names – Nvidia, TSMC, SK Hynix – while funds that stuck to their process and avoided the crowded trades have lagged badly. Anyone sitting on losses is right to wonder whether they got anything wrong along the way but making hasty decisions while burned by the losses can scar even more.
The biases working against you
Three psychological traps worsen drawdowns, as Kartik Kumar, part of the investment team on the Aurora UK Alpha trust, recently told Trustnet.
Loss aversion makes investors oversensitive to risk signals. Anchoring fixes expectations on recent history rather than what's ahead. Career incentive pushes professionals toward the crowd, because being wrong alone is career-ending but being wrong together is acceptable.
Kumar also identified a fourth distortion: ‘the gap between the experiencing self and the remembering self’, whereby investors recall the peaks and troughs – the money made, the money lost – but they compress the time in between. Drawdown periods that lasted three years get mentally shortened.
It is, Kumar said, why people go on to have three or four children: they remember the sleepless nights of the first, but memory self-edits and compresses years of exhaustion into something more bearable than it actually was.
On Reddit's r/ukpersonalfinance, the same patterns appear in retail form: checking portfolios daily, feeling physically sick at the red numbers and an urge to sell to stop the pain.
One user, down 30% after putting half a £70,000 stocks and shares ISA into crypto exchange-traded funds (ETFs), described wanting to move to a higher-paying job just to cover the loss. The replies he got from other users were not advocating portfolio action but a change of behaviour, with the most upvoted response saying to delete the trading app.
Tom Stevenson, investment director at Fidelity International, backed staying put with maths.
A £100 investment in the FTSE 100 at the end of 1991, with dividends reinvested, would have grown to £1,500 by February this year. Miss the best 10 days over that period and the pot halves to £750. Miss the best 20 days and it falls to £470.
The problem is that in volatile markets, the best and worst days cluster together – so an investor who gets out to avoid the falls will almost certainly miss the rebounds too.
How professionals handle it
The instinct to act – to sell, to switch, to do anything – is understandable. The question is how to override it with something more rigorous and professional investors often build this into their process.
Ben Mackie, senior fund manager at Hawksmoor, starts looking at his losses when they happen with scepticism.
“Our first assumption isn't ‘this is a buying opportunity’. The market is often efficient,” he said. “So we return to the investment thesis, we interrogate the manager, before seeking to take any trading activity.”
The central question is what caused the fall: sentiment (investors applying a lower multiple to the same earnings stream, with the underlying fundamentals intact) or a genuine deterioration in what the business or portfolio can produce.
“Where the drawdown has been driven by a de-rating and the fundamentals haven't deteriorated, that's when we start thinking this drawdown is an opportunity,” he said.
To be able to analyse that, Hawksmoor uses a written template. When a holding is bought, the team documents the investment thesis under four headings: valuation, fundamentals, manager quality and what the position contributes to the portfolio. When something goes wrong, they return to that document.
“Decomposing the investment thesis into those categories means we can be a bit more granular in identifying where there've been problems,” Mackie said.
The manager question
Knowing whether to hold also means knowing whether the manager is the problem. Mackie separated two situations that investors often conflate: a manager whose process has broken and a manager whose style is simply out of favour.
The current environment is a test of that. Funds without exposure to AI infrastructure stocks – Nvidia, TSMC and their peers – have had a hard time keeping up with indices that have become increasingly concentrated in those names but that is not evidence of failure.
“They're really sticking to their knitting but don't have the go-go stocks of the day,” said Mackie, who will be patient with those managers.
What would concern him is the opposite: a manager who abandons their process to chase what is working. “That would be a much bigger red flag for us than a portfolio that's drawn down because sentiment is against that particular part of the market,” he said.
Valuation discipline, Mackie argued, is also the best defence against buying something at the wrong point in its cycle. By late 2021, quality-growth funds – Fundsmith Equity, Finsbury Growth & Income, Evenlode Income – had re-rated sharply.
Hawksmoor had zero exposure not because of a view on those managers' ability but because the valuations no longer offered a margin of safety. When rates rose in 2022, those funds de-rated.
Hawksmoor has recently started adding some exposure back, including Castlebay UK Equity and Evenlode Income, because the portfolios now trade on their highest free cash flow yield in the funds’ history.
When to sell
The hardest decision is admitting the thesis was wrong. Mackie's answer to the behavioural problem – the inability to sell at a loss – is humility. A hit rate of 55% is, he said, what a very good active manager achieves. That means 45% of calls are wrong.
“That humility and acceptance – and the empirical evidence supports this – that you're not going to get everything right, makes it easier to actually say we got this wrong and we need to move on,” he said.
Keeping a pipeline of ideas helps too. If there is always something on the bench competing for capital, the decision to exit a losing position becomes about deploying money into something better, rather than just crystallising a loss.
Kumar's version of the same discipline is to anchor to intrinsic value rather than price. If an investor knows what something is worth – not what it costs, but what the underlying assets or earnings actually represent – then they are able to reframe a price fall in their head.
He used Frasers as an example: £20,000 of shares currently buys around £48,000 worth of underlying assets and wealth, by his estimate. That reframing does not eliminate the pain but it changes what the pain means.