Glossary · Risk · Beginner-friendly
Drawdown
In plain English
A drawdown is how far your investment fell from its recent high before it recovered (if it does). It measures the depth of the hole.
Everyday analogy: Climbing a hill, slipping down, then climbing again - the slip is the drawdown.
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Why it matters
Drawdown is the pain metric. If you cannot tolerate a strategy’s historical holes, you will abandon it at the worst time.
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Why investors track it
Max drawdown shows the worst historical pain. If you cannot emotionally or financially tolerate it, the strategy does not fit.
Behavior risk
Large drawdowns trigger panic selling. Predetermined rules beat improvising mid-decline.
Simple examples
50% hole
A portfolio that falls 50% needs a 100% gain to get back to even. Drawdowns compound the comeback math.
Comeback math
A 30% drawdown needs ~43% to recover. A 50% drawdown needs 100%. Depth matters more than people expect.
Easy mistakes to avoid
- Looking only at average returns
- Assuming past max drawdown is the worst that can happen
- Doubling down mid-drawdown without a new thesis
Remember: Know your drawdown tolerance before the market tests it.