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How drawdown is measured
Drawdown is the percentage difference between a peak value and the subsequent low, before a new peak is set. Three flavors matter for advisory work:
- Maximum drawdown — the worst peak-to-trough loss observed in a period.
- Current drawdown — the percentage below the most recent peak.
- Recovery period — the time from the trough to the new peak.
Why drawdown matters more than volatility for clients
Volatility (standard deviation) treats up-moves and down-moves symmetrically. Clients do not. A client's experience of risk is asymmetric — the pain of a 30% loss is much more vivid than the pleasure of a 30% gain. Drawdown captures the pain side directly. When advisors discuss "how much loss can you tolerate," drawdown is the right vocabulary.
Drawdown in the suitability conversation
A defensible suitability discussion typically anchors on a drawdown number the client has acknowledged in writing. "In a recession or market correction, this portfolio could lose 25–35% of its value before recovering, with recovery typically taking 18–36 months." The client's acceptance of that range is the documented basis for the strategy.
Strategy-specific drawdown norms
- 60/40 balanced — historical maximum drawdowns near 30% in major recessions.
- All-equity — historical maximum drawdowns near 50% (2008, 2020 trough).
- Private credit and interval funds — drawdowns can be smaller in published terms but mask liquidity and gating risk.
- Concentrated single-stock — drawdowns of 60%+ are common; recovery may never happen.
How StratiFi thinks about drawdown
Drawdown is the loss the client will remember. The firms that defend their advice well are the ones that anchored the suitability conversation in a drawdown range the client acknowledged in writing, and who can produce that record alongside the portfolio when an examiner asks why this strategy was appropriate.
Frequently asked questions
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Is a smaller drawdown always better?
Not necessarily. Lower-drawdown strategies (low-volatility, market-neutral) often have lower long-term returns. Drawdown is a trade-off the client must understand, not a quality to maximize unconditionally. -
How is drawdown different from volatility?
Volatility measures dispersion of returns, treating up and down moves the same. Drawdown measures only the down side — peak-to-trough loss. Clients feel drawdown; volatility is a statistical abstraction. -
What drawdown number should I tell a client to expect?
Use historical drawdowns of comparable strategies as the anchor — typically the worst 1-2 episodes in the last 25 years — and document the client's acknowledgment of that range. Round to ranges, not exact percentages.