Review & Monitoring
Drawdown
Definition
The peak-to-trough decline in portfolio value over a specific period before a new high is reached.
Drawdown measures peak-to-trough loss over a period and is one of the clearest ways to describe realized portfolio pain.
Why it matters
It measures how much the portfolio fell from its best point and how long the recovery took. Both dimensions matter.
What most investors miss
The gap between what the term means and how it is usually applied.
They focus on the size of the drawdown but ignore the recovery period. A deep drawdown that recovers quickly is different from a shallow one that lasts years.
How to read it
Read drawdown as a stress test of the portfolio's construction. Ask whether the level of drawdown was consistent with the portfolio's stated risk tolerance.
Multi-account lens
How this term reads differently across brokers and accounts.
Calculating true drawdown for a fragmented portfolio requires consolidated value at every point in time. Account-level drawdowns cannot be summed to get the portfolio drawdown.
Related terms
Terms that connect to drawdown.
Volatility
The degree to which the portfolio's value fluctuates over time.
Portfolio Performance
The overall return of the portfolio over a defined period accounting for all holdings cash and distributions.
Sharpe Ratio
A measure of return per unit of risk calculated as excess return divided by the standard deviation of returns.
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