A drawdown is the decline from a portfolio's peak value to its subsequent trough, usually expressed as a percentage. It measures the depth of a loss actually experienced, rather than the variability of returns around an average.
Maximum drawdown is the largest such decline over a period. Duration matters too: how long the fall lasted, and how long it took to recover the previous peak.
Recovery time is frequently the harder part to sit through. A short sharp fall is easier to tolerate than a long grinding one of the same depth.
Standard deviation treats upside and downside identically, which no investor does. Drawdown describes only the part people actually mind.
Asking a client how they would feel about a portfolio falling by a specific percentage over a specific period gets a more useful answer than asking about volatility.
It is a historical measurement of a specific period. It is not a limit, a boundary, or a prediction, and a strategy's largest past decline is not a forecast of its largest future one.
A drawdown figure is only meaningful against a plan. The same decline is survivable at thirty years from a goal and potentially not at three, which is a capacity question.
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