A drawdown is simply the drop from a portfolio's peak value to its lowest point before a new peak is made. It sounds like a simple concept, but its math is brutally asymmetric, and that asymmetry is the single most underrated force in long-term investing.
The asymmetry, in numbers
- A 10% loss requires an 11% gain to recover.
- A 25% loss requires a 33% gain to recover.
- A 50% loss requires a 100% gain to recover.
- A 75% loss requires a 300% gain to recover.
The deeper the hole, the disproportionately larger the climb required to get out of it. This is why risk management is not a defensive afterthought bolted onto a strategy — it is the mechanism that keeps compounding intact. A strategy that returns a modest amount consistently, while avoiding deep drawdowns, will often outperform a strategy that swings for higher returns but occasionally gives most of them back.
What to look for beyond the headline return
When evaluating any track record — including the equity curves shown on this site — the headline CAGR tells only part of the story. Maximum drawdown, the length of time spent recovering from it, and the consistency of monthly returns matter just as much for understanding whether a strategy's return profile fits your own risk tolerance and time horizon.
This article is educational in nature and does not constitute investment advice. Every investor has a different capacity for drawdown risk; that capacity should be assessed individually, ideally with a qualified professional.