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.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
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.
Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice