Clients don't ask about standard deviation, but they remember the drawdown – how far their account fell from its high and how long it took to get back.
Decades of market data show repeated equity drops of more than 30 percent, with recovery periods that can run for years. These episodes can derail plans if you don't prepare clients for both the depth and the length of potential declines.
In this article, we'll discuss how to use drawdowns as a simple tool in risk profiling, portfolio design, and review meetings.
A drawdown is how far a portfolio falls from its most recent peak before it starts to recover. It is measured from this peak down to the subsequent low. This focus on the last peak value matches how clients recall losses when they review statements.
You usually express a drawdown as a percentage. If a portfolio peaks at $1 million and later bottoms at $750,000, the drawdown is $250,000 divided by $1 million, or 25 percent. The formula is:
(Peak value − Trough value) ÷ Peak value × 100 = Drawdown (%)
You can also use this drawdown calculator:
Enter a portfolio's peak and trough values to see the drawdown percentage.
Maximum drawdown is the worst peak-to-trough decline over a given period. This makes it a useful way to compare strategies that have similar returns but very different loss paths.
Drawdowns also have a time dimension. Depth tells you how much the portfolio fell. Duration shows you how long it spent below its prior peak before getting back to that level. Together, these elements give you a clear way to explain risk.
Volatility tells you how much returns move around an average. It treats sharp gains and sharp losses the same. Drawdown focuses on the fall from a peak and the time the portfolio stays below its previous high. Drawdown lines up with how clients experience risk in dollars and in months or years, instead of in statistical units.
Clients rarely remember annualized volatility, but they remember how far their account fell from its high and how long it stayed below that level. Market research over many decades shows several equity drawdowns of more than 30 percent, followed by long stretches before prior peaks were reached again. These are the episodes that drive panic selling, sharp de‑risking, and abandoned plans.
Maximum drawdown gives you a figure to describe the worst peak‑to‑trough loss a strategy has suffered over a period. Standard deviation can't tell you that. Two portfolios can share the same volatility and average return but have very different maximum drawdowns and recovery paths.
When you build plans, you can use maximum drawdown to frame risk budgets in plain language, such as "this mix has historically been down about 20 percent at most." This is easier for clients to understand and tie back to their spending, time horizon, and comfort level.
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A drawdown hurts more than the same percentage gain helps because recovery isn't symmetrical. Once a portfolio falls, each percentage point of loss applies to a smaller base. Advisors can use a simple loss‑and‑recovery table to show clients why avoiding deep drawdowns matters so much.
Use this table to show clients how much return they need to get back to even after common loss levels.
| Portfolio loss | Required gain to recover |
|---|---|
| 10% | 11% |
| 20% | 25% |
| 30% | 43% |
| 40% | 67% |
| 50% | 100% |
| Try your own loss: % | 33% |
A 50 percent drawdown needs a 100 percent gain just to return to the prior peak. Researchers use this same math to show how far indexes had to rise after major market crises.
This also feeds directly into sequence‑of‑returns risk. For clients still accumulating, a drawdown early in the plan can be a buying opportunity because ongoing contributions purchase more units at lower prices.
For retirees or foundations drawing cash out, the same early drawdown is riskier. They are selling units when prices are depressed, which makes the required recovery gains harder to achieve with a smaller pool of capital.
Historical data show that sharp drawdowns are a normal part of equity investing, even when long‑term returns look strong. For advisors, it helps to translate those patterns into simple stories you can use in client meetings. Here are some examples:
One long‑running equity index has seen repeated peak‑to‑trough drops of more than 30 percent. In some cases, recoveries took several years before the prior high was reached again. This is the return path that sits behind the headline numbers in many asset allocation assumptions. It is a normal and recurring part of long‑term investing.
Research on funds and strategies shows cases where two portfolios delivered similar annualized returns but had very different drawdowns. One spent most of the period within 10 percent to 15 percent of its high. The other fell more than 30 percent at several points and spent long stretches underwater before recovering. Same return, but very different client experience.
Drawdown work that uses "underwater" charts tracks how far below its peak a portfolio sits over time. Some diversified portfolios have remained between 10 percent and 20 percent below their last high for years before finally breaking through. This is exactly the period when clients start asking if the strategy still works.
For planning, these examples give you realistic ranges for how far a portfolio might fall and how long clients may need to wait for a new high.
If you want another angle on how concentrated equity stories can shape both returns and drawdowns, read this article on the "Magnificent Seven" and what may come next for those leaders.
Drawdowns hit harder when a client is taking money out instead of adding to the portfolio. Retirees and other clients who rely on portfolio withdrawals face market declines and regular outflows at the same time. This combination can turn a temporary drop into a lasting cut in income.
When markets fall and withdrawals continue:
You can plan around this instead of reacting after the fact:
For retirees, managing drawdown risk involves planning ahead to limit forced selling during deep declines and sticking to an agreed rebalancing approach.
Visit our retirement planning section for more tips and strategies on how to maximize your retirement savings.
You can't build a growth portfolio with zero drawdowns, but you can control how deep they usually run and how clients fund spending when markets fall. This is where your planning and process matter more than your forecasts. Here are a few practical tips:
Set equity, bond, and alternative weights with an eye to historic peak‑to‑trough losses and not returns alone. A higher equity share lifts long‑run growth but also raises the worst likely drawdown.
Mix assets that rarely suffer large drawdowns at the same time. Equities, high‑quality bonds, and select alternative investments can create a smoother combined peak‑to‑trough path than any one sleeve.
Keep a core of investment‑grade bonds and a small cash or short‑term reserve. This "spending bucket" can cover several years of withdrawals, so clients avoid forced equity sales in bear markets.
Set clear rules for taking gains on strong positions and topping up weaker ones after big moves. This helps clients buy at lower prices and sell at higher prices instead of reacting emotionally.
Match expected drawdown ranges to the client's holding period. A 15‑year investor can ride out deeper equity swings than someone funding tuition or retirement within three years.
Design portfolios around drawdowns your clients can live with, then use buckets, bonds, and rules‑based rebalancing to carry them through the worst episodes.
Clients don't think in standard deviation. They think in dollars lost from the high and how long it took to get back. How you explain that path before and during a sell-off often decides whether they stay with the plan. Here are some practical ways to do that in day‑to‑day client conversations:
Make it clear that equity‑like returns come with equity‑like drops. You aren't promising to avoid the next drawdown. You are promising a plan for how to live through it without blowing up the strategy.
Pick one or two visuals you can reuse in every review, so clients get familiar with them. These include:
Use the same language and visuals you shared when you first outlined the plan. Keep the focus on the agreed process and on what you and the client can control. Focus on:
A steady script like this turns drawdowns from shocking events into rehearsed moments in the plan.
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