what is a drawdown 
a drawdown is a peak to trough decline during a specific period for an investment trading account or fund a drawdown measures the historical risk of different investments compares fund performance or monitors personal trading performance it is usually quoted as the percentage between the peak and the subsequent trough if a trading account has 10 000 in it and the funds drop to 9 000 before moving back above 10 000 then the trading account witnessed a 10 drawdown investopedia michela buttignolunderstanding drawdownsas noted above a drawdown measures an investment or trading account s decline from the peak before it recovers back to that peak the ulcer index ui helps to track these movements it remains in effect as long as the price remains below the peak in the example above the drawdown is only 10 until the account moves back above 10 000 once the account moves back above 10 000 then the drawdown is recorded this method of recording drawdowns is useful because a trough can t be measured until a new peak occurs as long as the price or value remains below the old peak a lower trough could occur which would increase the drawdown amount drawdowns help determine an investment s financial risk the sterling ratios use drawdowns to compare a security s possible reward to its risk a drawdown can refer to the negative half of the distribution of returns of a stock s price i e the change from a share price s peak to its trough is often considered its drawdown amount for example if a stock drops from 100 to 50 and then rallies back to 100 01 or above then the drawdown was 50 or 50 from the peak drawdowns are of particular concern to those in retirement in many cases a drastic drawdown coupled with continued withdrawals in retirement can deplete retirement funds considerably stock drawdownsa stock s total volatility is typically measured by its standard deviation yet many investors are mostly concerned about drawdowns instead this is especially true for retirees who withdraw funds from pensions and retirement accountsvolatile markets and large drawdowns can be problematic for retirees many look at the drawdown of their investments from stocks to mutual funds and consider their maximum drawdown mdd so they can potentially avoid those investments with the biggest historical drawdowns risk of drawdownsdrawdowns present a significant risk to investors when considering the uptick in share price needed to overcome a drawdown for example it may not seem like much if a stock loses 1 as it only needs an increase of 1 01 to recover to its previous peak but a drawdown of 20 requires a 25 return to reach the old peak a 50 drawdown seen during the 2008 to 2009 great recession requires a whopping 100 increase to recover the former peak 1some investors choose to avoid drawdowns of greater than 20 before cutting their losses and turning the position into cash instead the uptick in share price needed to overcome a particularly large drawdown can become significant enough that some investors end up just getting out of the position altogether and putting the money into cash holdings instead assessment of drawdownsdrawdown risk is typically mitigated by having a well diversified portfolio and knowing the length of the recovery window if a person is early in their career or has more than 10 years until retirement the drawdown limit of 20 that most financial advisors advocate should be sufficient to shelter the portfolio for a recovery but retirees need to be especially careful about drawdown risks in their portfolios since they may not have a lot of years for the portfolio to recover before they start withdrawing funds diversifying a portfolio across stocks bonds precious metals commodities and cash instruments can offer some protection against a drawdown as market conditions affect different asset classes in different ways 