12.7What is drawdown?
1What is it?
Drawdown is the fall from your portfolio’s peak value to its lowest point after that.
2Why does it exist?
Big drawdowns need huge gains to recover and cause emotional mistakes.
3Diagram
| Loss | Gain needed to recover |
|---|---|
| −10% | +11% |
| −20% | +25% |
| −30% | +43% |
| −50% | +100% |
| −75% | +300% |
| −90% | +900% |
4Calculation
Recovery gain = Loss ÷ (1 − Loss)
- Loss 50% → 0.5 ÷ 0.5 = 100%.
Halve your money and you must double it to get back.
5Quick revision
- Peak-to-trough fall.
- Recovery needs bigger gains.
- Avoid deep drawdowns.
6Knowledge check
Q1. Gain needed after a 20% loss?Show answer
25%.
Q2. After a 40% loss?Show answer
≈ 66.7%.
Q3. Why avoid big drawdowns?Show answer
Recovery is hard and emotions take over.