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Drawdown

The decline from a portfolio's or stock's peak to its subsequent low.

Risk & PsychologyBeginner

Definition

Maximum drawdown is the biggest such fall over a period. Drawdowns matter because recovering requires a larger gain than the loss: a 20% fall needs a 25% gain to get back, a 50% fall needs a 100% gain.

Formula

Gain needed to recover = loss / (1 - loss)

Example

Hypothetical exampleA $10,000 account that falls 50% to $5,000 must rise 100% to get back to $10,000.

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