CapitalTime

Articles on investing and capital management, with a quantitative focus.

It’s a Drawdown!

2026-03-19

A drawdown is the percent decline from a peak value. Any time a portfolio declines, you’re watching a drawdown in progress.

One never knows how severe a drawdown will be. It might turn out to be a minor decline of just a few percent, or a very serious market drop.

Volatility Is Inevitable

The stock market, or a diversified portfolio, provides high returns over a long time period. For example, the long-term performance of my portfolio has been 7.2% CAGR. However, the “cost of admission” is volatility: the investor will occasionally suffer through declines.

Tragically, one cannot get the high returns without also experiencing volatility. You can find an exploration of this in the Rational Reminder podcast, Episode 353, which discussed the market drop in April 2025.

Historical Studies

Using a tool like testfolio, one can understand the historical drawdowns of a portfolio. These historical studies don’t provide any guarantees for the future. Rather, they show you what to expect, if the future behaves similarly to the past.

For example, my portfolio is currently in a 4% drawdown from a recent peak. Looking at the drawdown history for my portfolio, I see the following:

These figures only apply to my asset allocation.

Although one can’t take these numbers too literally, they offer a rough idea of what to expect. The current drawdown (4%) is in the ‘extremely common’ territory.

Unfortunately, the drawdown could become much worse!

— Jem Berkes