Glossary

Drawdown

The fall from an investment's peak value to its lowest point before it recovers.

A drawdown measures how much you would have lost if you had bought at the top. The maximum drawdown is the largest such fall over a period. A portfolio that falls from $100,000 to $60,000 has a 40% drawdown.

Drawdowns matter because investors live through them. A strategy with a good average return and a 50% drawdown is hard to hold, and selling at the bottom turns a paper loss into a real one.

A drawdown measured from quarter-end to quarter-end is shallower than one measured day by day.

  • CAGR (compound annual growth rate): The steady yearly rate that would turn a starting value into an ending value over a period.
  • Backtest: A test of an investment rule on past data, to see how it would have done.

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