Drawdown

A drawdown is the decline from a portfolio’s peak value to its lowest point before a new peak is reached, expressed as a percentage. Where volatility describes wobble, drawdown describes the fall: it is the real-world measure of what an investor actually has to sit through.

The math

The asymmetry is the whole lesson.

Drawdown	Gain needed to recover
20%	25%
33%	50%
50%	100%

Losses compound against you faster than gains repair them, which is why two strategies with the same average return can end in very different places if one takes deeper drawdowns along the way.

The trap

Confusing tolerance on paper with tolerance in practice. Almost everyone accepts a hypothetical 40 percent drawdown in a questionnaire; far fewer hold their positions through the real thing, with headlines screaming and the account down six figures.

The costliest investing behavior on record is capitulating near the bottom of a deep drawdown, converting a temporary decline into a permanent loss.

The move

Size positions so the worst plausible drawdown is survivable financially and psychologically: the best strategy is worthless if you abandon it at the low. Examine any strategy’s historical maximum drawdown, not just its returns, and assume the future will eventually test something similar.

Concentration builds wealth and deepens drawdowns; the honest question is not “what return do I want” but “what fall can I hold through”.