drawdown
The peak-to-trough decline in the value of an investment or portfolio before a new peak is achieved, measuring the risk of loss.
Example
“The hedge fund suffered a maximum drawdown of 35% during the 2008 financial crisis before recovering.”
Memory Tip
Drawdown = how far the investment is 'drawn down' from its peak.
Why It Matters
Understanding drawdown helps investors evaluate the true risk they face during market downturns. Rather than just looking at average returns, knowing the maximum loss from peak to trough allows you to prepare emotionally and financially for how much your portfolio could decline before recovering.
Common Misconception
Many people confuse drawdown with a single bad year of returns, but drawdown specifically measures the decline from the highest point to the lowest point that follows. A portfolio might lose 20 percent over several months and then recover, but the drawdown only counts that temporary peak-to-trough movement, not the full year-to-year performance.
In Practice
Imagine you invest 100,000 dollars in a stock fund that grows to 150,000 dollars by mid-year. If the market then falls and your portfolio drops to 105,000 dollars before recovering, your drawdown is 45,000 dollars or 30 percent from that 150,000 dollar peak. This drawdown reveals the worst loss you would have experienced during that period, helping you understand if you could have stayed invested without panic selling.
Etymology
From 'draw down' — the amount by which value is 'drawn down' from its peak.
Common Misspellings
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See Also
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