Drawdown

Drawdown measures your portfolio's decline from its peak. Learn to interpret it and how Index Balance tracks it automatically.

Definition

Drawdown measures the decline in a portfolio's value from its peak to a subsequent trough, expressed as a percentage. It is one of the most intuitive risk metrics because it directly shows how much you have "lost on paper" between the best and worst points in a given period.

Unlike volatility, which measures dispersion in both directions, drawdown is directional: it always represents a loss from a high point. Index fund investors can better tolerate risk when they understand that drawdowns are inevitable events, not signals that something is fundamentally wrong.

A smaller maximum drawdown indicates better capital preservation during the worst periods. However, very conservative portfolios that avoid large drawdowns typically sacrifice long-term returns.

Practical example

Your portfolio reached a peak value of €15,000 in January 2022. By October of that year, it had fallen to €12,300. The drawdown at that point was -18% ((12,300 - 15,000) / 15,000). The portfolio remains in drawdown until it recovers above €15,000.