Portfolio
Drawdown
Drawdown captures the depth of a loss from a prior high before a new high is reached. A portfolio that falls from $100,000 to $75,000 has suffered a 25% drawdown.
Maximum drawdown, the largest such drop over a period, is a favorite risk measure because it reflects the pain an investor would actually have endured. Recovering from a deep drawdown requires an even larger percentage gain to break even.
Understanding potential drawdowns helps investors size positions and set expectations. Strategies that look attractive on average can hide gut-wrenching drops that test an investor's discipline.
Example
A 50% drawdown requires a 100% gain just to return to the starting value, showing how costly deep losses are.
Drawdown — FAQ
What is Drawdown?
A drawdown is the peak-to-trough decline in the value of an investment or portfolio, measuring how far it has fallen from its highest point.
Can you give an example of Drawdown?
A 50% drawdown requires a 100% gain just to return to the starting value, showing how costly deep losses are.
Understanding creates conviction.
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