Drawdowns

What drawdowns are, why recovering from them takes more than you lost, and what real market declines in 2008, 2020 and 2022 looked like.

Measuring the fall from the top

A drawdown is the decline from a previous peak to a later low, usually shown as a percentage. If a portfolio grows to $10,000 and then falls to $8,000, it is in a 20% drawdown until it climbs back above $10,000. The maximum drawdown is the largest such decline over a period. It answers a very practical question: how much pain would you have had to sit through?

An illustrative drawdown: the shaded area shows time spent below the previous peak.

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