Drawdown

Losing 50% requires doubling your capital just to get back to the start. This asymmetry explains why limiting falls matters more than chasing rises — and why asset allocation puts so much effort into capping the plausible drawdown.

Historic reference drawdowns

• 2008 (financial crisis): the S&P 500 fell ~57% from its peak; it took about 5 years to recover.
• 2020 (COVID): a ~34% fall in one month; recovered in under 6 months.
• 2000–2002 (dot-com): the Nasdaq fell ~78% and took 15 years to reach new highs.

The lesson is double: deep falls are normal (not system failures), and their duration matters as much as their depth — there are drawdowns of months and drawdowns of a decade.

Drawdown vs volatility

Volatility measures the average swing; drawdown, the worst actual blow. To decide how much risk you can bear, drawdown is more useful: nobody abandons their plan because the standard deviation is 18%, but plenty of people sell when their portfolio is 40% down. Ask yourself what maximum drawdown you would sit through without selling and build the portfolio from there.

For dividend investors there is a kind nuance: the income falls much less than prices. In 2008, S&P 500 dividends fell far less than share prices, and whoever lived off the income did not need to sell at the bottom.