Glossary / Behaviour

Drawdown

A drawdown is the fall from a portfolio's peak value to its trough, expressed as a percentage, and recovering from one requires a larger percentage gain than the loss because the gain is calculated on a smaller base.

A fifty percent fall needs a one hundred percent gain to get back. A twenty percent fall needs twenty five percent.

The asymmetry is arithmetic, not sentiment, and it is why avoiding large losses matters more than capturing large gains.

Where people get it wrong

Assuming a thirty percent fall needs a thirty percent recovery. It needs nearly forty three.

The framework behind it Drawdown recovery math sets out the rule, the arithmetic and where it breaks.

Read the framework

Related terms

Volatility drag Volatility drag is the gap between the average annual return of an investment and the return an investor actually compounds, caused by losses reducing the base on which later gains are earned. Duration Duration measures how much a bond's price moves for a one percent change in interest rates, so a bond with a duration of eight falls roughly eight percent when rates rise one percentage point. Loan to value Loan to value, or LTV, is the mortgage amount expressed as a percentage of the property's value, and it is the single number that determines how far a price fall has to go before the owner's equity is gone.

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