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Concept · Asset allocation

What is a drawdown?

Direct answer The fall from a peak to the low that follows it, in percent of the peak. The worst drawdown of a portfolio is the largest such fall in its record: the loss a holder would have seen at the worst moment, not the loss in any one calendar year. The site reports it in dollars per $100,000 held at the peak.

A calendar-year loss understates what a household lives through, because the peak and the low rarely fall on year ends. The Grow wealth book lost 21% in calendar 2008 and 35% from its 2007 peak to its 2009 low. The three books on the Asset allocation page are described by the fall a household holds through, about a third, a quarter and a fifth, and that is the drawdown, from the daily peak.

Drawdown is measured on the way down and says nothing about how long the recovery took; a fall of a third that recovers in two years and one that takes ten look the same on this measure.

Sources

  1. Magdon-Ismail and Atiya (2004), 'Maximum drawdown', Risk 17(10)risk.net

Used in

60/40 is the floor, and three books clear it from both starts Three books of stocks, Treasuries and gold returned more per unit of risk than 60/40 from a 2006 start and a 2010 start, and lost less in 2022. The return gap depends on the start; the edge does not. Bitcoin is sized by the loss a household can hold, not by the optimizer Three percent of bitcoin added two points a year to the Grow wealth book since 2016 for a worst fall a third of a point deeper. The optimizer wants 69%. Once a year cannot hold the cap. Gold is a view on the decade, not a backtest result Gold held in 2008 and 2022 and sits at 15 to 30% in the optimizer's answer from a 2006 start and a 2010 start. It also lost 62% from 1980 to 1999. Its weight is a view on the next decade. Long Treasuries and listed real estate do not pay for their risk From 2006 and from 2010, long Treasuries returned under 3% a year for stock-sized swings and listed real estate returned less than stocks for more risk. Neither improved 60/40. The house is stocks, at a fifth of its value A house moves with the stock market at a beta near 0.2, so a $1.5M house supplies $300,000 of stock exposure. Counted, the savings of a household with a house hold more stock than the plain book.

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