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The drop from a portfolio's peak value to its lowest point before it recovers — a measure of how painful the worst stretch was.
Why It Matters
Drawdown answers the question 'how bad did it get?' If an account grew to $12,000 and then fell to $9,000 before recovering, that's a 25% drawdown. It matters because people rarely quit a strategy at the top — they quit near the bottom of a deep drawdown, locking in the loss. A backtest with high returns but a brutal drawdown may be unlivable in practice, even if the math 'works' over the full period.
Key Points
- Peak-to-trough decline before a new high is reached
- Measures the financial and emotional pain of the worst stretch
- A high-return strategy with a deep drawdown is often abandoned at the worst time
Related Terms
Common Questions
The drop from a portfolio's peak value to its lowest point before it recovers — a measure of how painful the worst stretch was. Drawdown answers the question 'how bad did it get?' If an account grew to $12,000 and then fell to $9,000 before recovering, that's a 25% drawdown. It matters because people rarely quit a strategy at the top — they quit near the bottom of a deep drawdown, locking in the loss.
Drawdown answers the question 'how bad did it get?' If an account grew to $12,000 and then fell to $9,000 before recovering, that's a 25% drawdown. It matters because people rarely quit a strategy at the top — they quit near the bottom of a deep drawdown, locking in the loss. A backtest with high returns but a brutal drawdown may be unlivable in practice, even if the math 'works' over the full period.
Peak-to-trough decline before a new high is reached
Measures the financial and emotional pain of the worst stretch
A high-return strategy with a deep drawdown is often abandoned at the worst time