Risk
Drawdown
The fall from a portfolio’s previous peak to its lowest point before it recovers.
How it works
Drawdown is risk as people actually experience it. Volatility is an abstraction; a 45% drawdown is a number you watch on a screen for two years.
Maximum drawdown — the worst peak-to-trough fall in a period — is the single most behaviourally relevant risk statistic, because it predicts whether someone abandons a strategy.
Where it misleads people
Recovery percentages are always larger than the fall. Down 50% needs +100%; down 80% needs +400%. This asymmetry is why avoiding catastrophic losses matters more than capturing every rise.
Formula
Drawdown = (trough value − peak value) ÷ peak value × 100Worked example
A portfolio peaking at $500,000 that falls to $325,000 has a 35% drawdown, and needs a 53.8% gain from the trough to recover.
Related terms
- Maximum drawdownThe largest peak-to-trough fall a portfolio or strategy suffered over the period examined.
- Recovery periodHow long it took a portfolio to climb back to its previous peak after a fall.
- VolatilityHow much an investment’s returns bounce around their average — the standard measure of risk.
- Underwater periodAny stretch of time during which a portfolio is worth less than its previous high.
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Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.