Pandemic Winners, Permanent Losers: The 40% ISA Drawdown Trap That 2.1 Million UK Investors Cannot Bring Themselves to Escape

In 2020 and 2021, a specific category of stock became the defining trade of a generation of new UK retail investors. Unprofitable technology companies, genomics funds, electric vehicle manufacturers, and the ARK Innovation ETF equivalent products available on UK platforms all delivered returns that made conventional investing look quaint. Some positions doubled. Others tripled. The message from every financial social media channel was identical: the old rules no longer applied.

Five years on, the data tells a different story. An estimated 2.1 million UK ISA holders are still carrying positions in assets that peaked between November 2020 and February 2021, many of which have declined by 40–70% from those highs. The question is no longer whether they bought at the top. The question is whether holding — or averaging down — makes any mathematical sense in 2026, and whether the behavioural forces keeping investors frozen are serving their financial interests.

The Assets in Question

The most prominent examples in UK retail portfolios are well documented. The Baillie Gifford funds — particularly Scottish Mortgage Investment Trust (SMT) and Baillie Gifford American — were among the most widely held growth vehicles in UK ISAs during the pandemic era. SMT peaked at approximately 1,400p per share in early 2021 and spent much of 2022–2024 trading in the 700–900p range, representing a sustained 35–50% drawdown from peak for investors who bought at the top.

Beyond Baillie Gifford, UK platforms saw heavy retail flows into:

• ARK Innovation equivalent funds (accessible via platforms including Interactive Investor and HL through feeder structures or direct US-listed ETFs for those with USD accounts)
• Individual EV stocks including Rivian, Lucid, and Arrival (the latter of which has since been delisted)
• Genomics and biotech ETFs such as the iShares Genomics Immunology and Healthcare ETF (IDNA)
• SPAC-adjacent positions acquired through early-stage technology trusts

For investors who bought these assets inside a Stocks and Shares ISA, the unrealised loss is currently sheltered from HMRC. But that sheltering creates a psychological trap with serious long-term financial consequences.

The ISA Loss Crystallisation Misconception

The most persistent myth in this space is that selling a loss-making position inside an ISA is somehow wasteful — that crystallising the loss "makes it real" in a way that continued holding does not. This is emotionally understandable but financially illiterate.

Inside an ISA, a loss is already real. It represents capital that no longer exists. Selling does not create the loss; it simply converts an unrealised loss into cash that can be redeployed. Unlike a general investment account, where crystallising a loss generates a capital loss that can be offset against future gains for CGT purposes, an ISA loss has no tax utility whatsoever. You cannot carry it forward. You cannot offset it. The only thing an ISA loss can do for you is sit there, invisible, while the cash that used to exist is unavailable for better opportunities.

This distinction matters enormously. An investor holding £10,000 of a pandemic-era biotech fund now worth £5,800 is not "protecting" anything by refusing to sell. They are choosing to stake £5,800 on the specific recovery of that specific asset rather than deploying £5,800 into any alternative.

The Averaging Down Fallacy

A common response to a 40% drawdown is to average down: to buy more of the same asset at the lower price, reducing the average cost basis and shortening the theoretical distance to breakeven. This strategy is mathematically coherent in specific circumstances — primarily when the investor has high conviction that the original investment thesis remains intact and the price decline is temporary and sentiment-driven rather than fundamental.

For the majority of pandemic-era growth assets, neither condition applies in 2026. The investment thesis for many of these companies was predicated on a zero-interest-rate environment, unlimited access to cheap capital, and growth-at-any-cost as a viable business model. All three of those conditions have been structurally revised. Averaging down into a position whose fundamental underpinning has changed is not disciplined investing — it is throwing additional capital at a deteriorating thesis.

The mathematical reality is stark. An asset that has fallen 40% requires a 67% gain to return to breakeven. An asset that has fallen 60% requires a 150% gain. These are not impossible numbers, but they represent a specific bet on a specific company or sector recovering to a specific prior valuation in an environment that no longer resembles the one that produced those valuations.

The Behavioural Science Behind Inaction

Psychologists have documented the mechanisms at work here extensively. Loss aversion — the tendency to feel losses approximately twice as intensely as equivalent gains — makes selling a losing position genuinely painful in a neurological sense. Investors experiencing this pain often engage in motivated reasoning: constructing narratives about why the asset will recover, selectively consuming bullish commentary, and avoiding information that contradicts the recovery thesis.

Sunk cost bias compounds the problem. The original purchase price becomes a psychological anchor that has no relevance to the current investment decision but exerts enormous influence over investor behaviour regardless. The investor is not asking "is this the best use of my £5,800 today?" They are asking "how do I get back to £10,000?" — a fundamentally different and less useful question.

What UK Investors Should Actually Do

The starting point is a position-by-position audit. For every holding that is more than 20% below its purchase price, investors should ask three questions:

1. Has the original investment thesis changed fundamentally?
2. If I did not already own this asset, would I buy it today at the current price?
3. Is there an alternative use of this capital with a higher probability-weighted return over my investment horizon?

If the answer to question one is yes, and the answers to questions two and three are no and yes respectively, the rational action is to sell. The ISA wrapper means there is no CGT consequence. The only cost is the bid-offer spread on exit and any platform transaction fee.

For positions still held on platforms including Freetrade, Trading 212, Hargreaves Lansdown, and AJ Bell, the mechanics of selling are straightforward. The harder task is the psychological one.

What to Watch in the Next 30 Days

Q1 2026 earnings season will deliver updated revenue and profitability data for many of the growth companies most widely held by UK retail investors. Any further downward revision to forward guidance — particularly from companies still burning cash — should be treated as new fundamental information rather than noise to be dismissed.

The ISA tax year deadline of 5 April 2026 is also relevant: investors who sell losing positions now free up ISA cash that can be reinvested before the deadline, maintaining the tax wrapper while repositioning into assets with a more credible return profile.

Verdict

Holding a 40% ISA loss in hope of recovery is not a strategy — it is a behavioural response masquerading as one, and the longer it continues, the more capital it costs.

This article is for informational purposes only and does not constitute financial advice. Your capital is at risk. Past performance is not a reliable indicator of future results.