Drawdown.
In plain English
Drawdown is the percentage decline of an investment from its most recent peak to its low point. A 50% drawdown means the asset fell 50% from its all-time high before recovering. Drawdown is what risk actually feels like to a portfolio holder: the sleepless-nights number, in contrast to volatility, the academic number. Every long-term investment experiences drawdowns; the question is how big and how long.
01Why it matters
Average annual returns are abstract. A 40% drawdown is visceral. The honest test of whether a portfolio matches risk tolerance is not 'can you handle the average return?' but 'can you handle the worst drawdown without panic-selling?' Most retirement projections quietly assume investors do not sell during drawdowns. Most investors do.
02The math, step by step
The S&P 500 fell about 34% in five weeks during the COVID crash of early 2020. An investor with $500,000 watched it become $330,000 in 35 days. Within five months it had recovered. The recovery did not erase the experience of opening a brokerage app and seeing $170,000 erased. That is drawdown.
03What this is NOT
Volatility (standard deviation) measures how widely returns vary, including small day-to-day moves. Drawdown measures the worst peak-to-trough loss over a specific period. A low-volatility asset can still have a big drawdown after a long quiet stretch; a high-volatility asset that recovers fast might have a smaller drawdown.