Investing term
What is Drawdown?
The peak-to-trough fall in an investment's value before it recovers.
A drawdown is the drop from an investment's peak value to its lowest point before it recovers, usually quoted as a percentage. If a fund climbs to $10,000, falls to $7,000, and later recovers, its maximum drawdown was 30%. It measures the depth of the pain, not how long it lasted.
Drawdown is the most visceral measure of risk — the actual paper loss you have to sit through, watching your balance shrink. Knowing the typical and worst-case drawdowns of your holdings ahead of time is what separates investors who hold on from those who panic-sell at the bottom. A portfolio you understand the drawdowns of is one you're far more likely to stick with.
A drawdown is the fall from an investment's peak to its low before recovery — here $10k to $7k, a 30% drawdown. It's the paper pain that tests whether you'll hold on.
For example
A fund that falls from $10,000 to $7,000 before recovering suffered a 30% drawdown — the gut-check stretch where many investors bail at exactly the wrong moment.
Learn it by doing
That's Drawdown in theory — it clicks when you use it. Practise it hands-on in a free, interactive lesson (Stage 3, Know Yourself: Risk Tolerance & Time Horizons).
Try the free lesson →Why it matters to you
Drawdown matters because it, not the average return, is what actually tests your resolve. An investment's long-run return is irrelevant if its drawdown scares you into selling partway down. Sizing your risk to a drawdown you could genuinely stomach — rather than to the return you'd like — is the practical way to build a portfolio you'll actually hold through a crash, which is where returns are won or lost.
⚠ Underestimating the drawdown you can hold
In calm markets a 40% drawdown sounds survivable; living through one, watching nearly half your money vanish, feels very different. Investors routinely overestimate the drop they can tolerate and discover the truth at the worst moment. Assume your real limit is shallower than it feels, and size your stock exposure accordingly.