What is a drawdown — and why it matters more than average returns
Sutra & Signal Research · Published · Last reviewed · 5 min read
The short answer
A drawdown is the fall in a portfolio's value from its previous peak to a later low, usually shown as a percentage. It measures the pain an investor actually lives through, which an average annual return hides.
Peak to trough
Suppose a portfolio rises to ₹50 lakh, falls to ₹35 lakh, and later recovers. The drawdown is (50 − 35) ÷ 50 = 30%. The maximum drawdown is the deepest such fall over the period you are studying.
The recovery asymmetry
Losses and gains are not symmetrical. After a fall, you need a larger percentage gain just to get back to where you were.
| Fall from peak | Gain needed to recover |
|---|---|
| 10% | 11.1% |
| 20% | 25.0% |
| 30% | 42.9% |
| 50% | 100.0% |
This is why disciplined managers often care more about limiting deep falls than about maximising the best years.
Why averages mislead
Two strategies can share the same average annual return while one of them falls 45% along the way. Investors who need to withdraw money, or who sell in panic, experience very different outcomes from the average.
Questions to ask any manager
- What was the maximum drawdown, and over which dates?
- How long did recovery take?
- Is the drawdown measured on the same portfolio as the headline return?
- Is it calculated before or after fees?
A track record without its drawdown is half a track record.