Drawdown
The decline from an investment's most recent peak to its subsequent trough, in percent. It is a direct measure of pain endured, and of the gain needed to recover.
Also called: maximum drawdown, max drawdown
A drawdown is how far an investment has fallen from its highest point so far. The maximum drawdown over a period is the worst peak-to-trough decline, a direct measure of how much pain a strategy asked its holder to endure.
Drawdowns matter because recovery is asymmetric: a 50% fall requires a 100% gain to get back to even. Managing the depth of drawdowns, not just chasing return, is central to building a strategy an investor can actually stay with through a full cycle.
Related terms
- VolatilityHow much an asset's price fluctuates over time. High volatility means larger swings. It measures turbulence, not direction, and it is not the same thing as risk.
- MomentumThe tendency of assets that have performed well (or poorly) recently to keep doing so for a time, a well-documented pattern used by trend and momentum strategies.