drawdown
Also called: maximum drawdown, max drawdown
The fall in value from a previous peak to a later low, as a percentage of the peak.
A drawdown is how far a portfolio has fallen from its last peak, measured as a percentage of that peak. The maximum drawdown is the deepest such fall in a period. It answers the question long-term investors actually feel: "how much could my savings drop before they start coming back?"
Two more numbers complete the picture. Recovery is the gain needed to get back to the old peak, and it is always bigger than the fall: after −50% you need +100%. Time underwater is how long the portfolio stays below its old peak, from the top through the bottom and back. For a long-term portfolio this can take years, and longer still in real terms after inflation.
Drawdown is a better guide than an average return when choosing how much risk to hold, because it is the number that makes people sell. A mix whose worst fall you could sit through is worth more than a mix with a higher average you would abandon halfway down.
Example
On Zapas's synthetic Tessaro World history, the deepest fall runs from month 12 to month 36: the index drops from 115.95 to 63.32, a maximum drawdown of 45.4%. Getting back to the peak needs a gain of 83.1%.
The fall takes 24 months and the climb back 48 more, so the portfolio is underwater for 72 months in nominal terms; after inflation it takes 11 years to regain the old real peak. Mixing in bonds softens it: a 60/40 mix falls at most 30.0% in real terms against 48.2% for all stocks.
Common mistakes
- Thinking a 45% fall needs a 45% gain to recover; it needs about 83%.
- Looking only at how deep a fall is and ignoring how long you stay below the peak.
- Measuring recovery in nominal money while inflation keeps the real loss open for years longer.
- Picking a mix by its average return without asking whether you would hold through its worst drawdown.
Learn it in the course
- Drawdown, recovery and time under water · Maximum drawdown, the gain needed to get back to the peak and how many months a portfolio can stay below it.
- Case: the "market is down 30%" message · Write the in-app message for a deep fall and decide when it should appear.
- Capstone: the launch memo and your own one-page plan · Write the launch memo for the app and your own one-page investment plan, including how to draw money down later.
- Stocks vs bonds: risk capacity, tolerance and the job you have · How different stock and bond mixes behaved, and how horizon, income and nerves decide the mix.
- Regular amounts, a lump sum and rebalancing rules · Investing at once vs in monthly parts, and rebalancing yearly, by a band or never: drift and drawdown.