Illustrated example
Peak to trough
Drawdown measures the fall from a high point to the low before recovery.
Illustrative example only, not historical market data.Start here
Key takeaways
- Drawdown measures decline from a prior high.
- A strong final result can still include a large drawdown.
- Drawdown is usually shown as a percentage loss from peak to trough.
- It helps users think about whether they could have stayed invested.
Plain-English idea
A drawdown is the distance from a high point to a later low point. If an investment grows from $10,000 to $15,000 and then falls to $11,250, the drawdown from the peak is 25%.
The important idea is that drawdown starts at a previous high. It is not just any loss. It asks: after things were going well, how far did they fall before recovering?
Why it matters
Final value does not show emotional difficulty. Two investments can both end at $20,000, but one may have dipped only 10% while the other fell 55% along the way.
Drawdown helps users imagine the lived experience of the scenario. Could you have stayed invested during the worst decline? Would you have needed the money before recovery?
Recovery takes more than the loss
A 50% loss needs a 100% gain to recover. This surprises beginners because percentages are measured from different bases. Losing half of $100 leaves $50. To get from $50 back to $100, the $50 must double.
This is why large drawdowns matter. They do not only feel bad; they also require larger percentage gains to return to the previous high.
Going deeper
Intermediate users often look at maximum drawdown, which is the worst peak-to-trough decline over a period. It can be compared with CAGR to understand the tradeoff between return and pain.
Drawdown does not capture every risk. It depends on the date range and price frequency. Daily data may show a different maximum drawdown than monthly data.
References