Drawdown
A portfolio’s fall from its peak, the most telling measure of the loss suffered.
Measuring the fall from the peak
A drawdown is a portfolio’s fall between its peak and a later low. The maximum drawdown, the worst such fall over a period, is the risk measure savers feel most: it says how much they would have seen their savings shrink at the worst moment.
A loss needs a larger gain to be erased: returns are asymmetric.
Hausse nécessaire = 1 / (1 - baisse) - 1
Case study
The Nasdaq, 2000 to 2015
After the dotcom bubble burst, the Nasdaq lost nearly 78% between March 2000 and October 2002. It needed more than 350% to get back: its peak was only surpassed in 2015.
Questions and answers
What drawdown should I accept?
The one you can live through without selling. An all-equity portfolio has seen falls of more than 50%; a share of bonds or cash reduces them.
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