Drawdowns
Definition, max drawdown, time-under-water, and why drawdowns are the risk metric most investors actually feel
Variance and Value-at-Risk are powerful institutional metrics, but they are not the metrics most investors actually feel. What investors feel is the drawdown — the percentage decline from a prior peak that they are currently sitting in, and the worst such decline they have endured. The S&P 500's peak-to-trough drawdown in the 2008 financial crisis was approximately 57%, peaking on October 9, 2007 and bottoming on March 9, 2009.
The index did not regain its prior peak until late March 2013 — roughly five and a half years of being underwater for an investor who had bought at the top. The NASDAQ Composite's drawdown after the dot-com peak in March 2000 was approximately 78% to its trough in October 2002, and the index did not surpass the March 2000 peak until April 2015 — fifteen years of drawdown. These numbers are not abstract risk statistics; they are lived investor experience.
That is the opening. Finishing a lesson is where it stops being interesting and starts being useful: the full lesson runs to 8 sections and ends with 6 practice questions. A free account is what opens the rest, and the other 255 lessons in the Academy with it. No card.
What this lesson covers
- 1Three drawdown statistics that matter
- 2Drawdown-aware portfolio construction
- 3Drawdown Path Visualizer
- 4Drawdown formulas and the Calmar ratio
- 5Major U.S. equity drawdowns and time-underwater — peak-to-trough peak-to-recovery
- 6The asymmetric mathematics of drawdown recovery — why deep drawdowns are uniquely consequential
- 7Where to see this on the platform
- 8Summary