What is drawdown and how is it interpreted?

There's no universally "good" maximum drawdown, because it depends on the asset and your risk tolerance, but there are useful references. A 100%-equity global portfolio has historically had drawdowns of -30% to -55% in the major crises (the S&P 500 fell -57% in 2008-2009 and around -34% in March 2020). A mixed portfolio of stocks and bonds usually has more contained drawdowns, of -15% to -30%. And very conservative strategies can stay below -15%.

The key isn't to seek the lowest possible drawdown (that usually means giving up return), but to know in advance the maximum drawdown to expect from your strategy and make sure you can endure it without selling. An aggressive momentum strategy, for example, can aim for returns of 20% a year but with drawdowns reaching -30% or more; that's only valid for someone with the stomach and the time horizon to bear it.

The biggest mistake is choosing a strategy by looking only at its past return and discovering its drawdown in the middle of a fall, when it's already too late. That's why it's worth asking before investing: "if this fell X% as it already did in the past, would I stay invested or sell?". If the honest answer is that you'd sell, that strategy isn't for you, however good its average return. The drawdown you can endure defines which investments are truly viable for you.

Many people confuse drawdown with volatility, but they measure different things. Volatility (the standard deviation of returns) measures how much an investment swings up and down in general, penalizing rises and falls equally. Drawdown, on the other hand, only looks at the real damage: the fall from a peak, which is what truly hurts and what makes the investor sell. You can have a low-volatility investment that nonetheless suffered a deep and long drawdown.

Drawdown is, in many ways, a more intuitive and honest risk measure than volatility for the retail investor. No one minds their portfolio swinging a lot if it always rises; what hurts is seeing your wealth below the peak for months or years. Volatility treats a 10% rise as "risk", which is counterintuitive. Drawdown focuses only on the side that matters: how much you lost and how long it took to recover it.

That's why modern risk metrics, like the Calmar ratio (annual return over maximum drawdown), complement the classic volatility-based ones like the Sharpe ratio. DeepTicker uses several of these metrics at once in its portfolio analysis and in the Alpha rating, because none alone tells the whole story: volatility measures the shaking and drawdown measures the maximum damage.

The most effective way to control drawdown is diversification: spreading capital across assets that don't all move at once (stocks from different sectors and geographies, bonds, gold). When some fall, others hold or rise, and the portfolio as a whole suffers less. A portfolio concentrated in a few stocks from the same sector can have huge drawdowns; a well-diversified one cushions the blows and recovers sooner.

Another lever is time horizon and discipline: historically, the major drawdowns of the stock market have always recovered over time, so the investor's worst enemy isn't the fall itself, but selling at the bottom. Having a clear plan defined before the fall (how much you can endure, what you'll do if it falls X%) avoids the panic decisions that turn a temporary drawdown into a permanent loss.

Strategies that rotate toward defensive assets in the bad times also help. Sector rotation with a refuge in low-risk assets when the market weakens, for example, seeks precisely to cut drawdown in exchange for some return in the good years. There's no way to eliminate drawdown without giving up return, but there is a way to moderate it to a level you can endure without abandoning your plan.

In DeepTicker's My Portfolio (`/seguimiento-de-cartera`) you can track your real portfolio with professional metrics that normally only funds use: time-weighted return (TWR), Sharpe ratio, alpha versus the S&P 500 and, of course, drawdown and maximum drawdown. The system automatically calculates how much you've fallen from your highs and how long you've been below them, from your own trade history.

Seeing your drawdown gives you a perspective the return alone hides: it tells you how much real risk you're taking on and whether your portfolio is as stable as you think. It's a tool for self-knowledge as an investor, because it confronts you honestly with the falls you've lived through and those you could live through, helping you calibrate whether your strategy fits your risk tolerance.

My Portfolio is free forever in DeepTicker, no card needed. And since each metric comes explained (what drawdown is, how it's calculated, what your figure means), the more you track your portfolio, the more you learn to manage risk with the rigor of a professional, without needing to know finance. DeepTicker is information and analysis so you decide: this is not financial advice.