The Drawdowns chart maps every single portfolio loss from any high point along the way.  Use this to study just how low a certain asset allocation has fallen, how long it has taken to recover, and generally how prepared you are both emotionally and financially to handle the downside risks with your own life savings.

Chart

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Overview

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In contrast to most portfolio explanations that generally seek to portray an investing idea in the most flattering possible light, the Drawdowns chart is designed to highlight the worst timeframes for any given portfolio. Each line traces the inflation-adjusted losses of a single start year from every high point along the way, with every possible start year overlaid on the same chart. A line at zero means the portfolio was at an all-time high in purchasing power, and every dip below is a real loss that a real investor once had to sit through.

Note that the color of the lines is sorted by start year. Darker lines are from older start years while lighter lines are from more recent start years. Hover over or tap any line to see the size of the drawdown and the start year behind it.

The two gray reference lines summarize the outer limits of the pain. The horizontal line marks the deepest drawdown on record, and the vertical line marks the longest one. Between those two numbers and the ulcer index in the corner, you get an honest picture of the downside that a simple volatility number like the standard deviation on the Annual Returns chart just can’t provide.

Featured Discussion

How To Manage Investment Drawdowns By Thinking Differently

Calculations

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Deepest Drawdown

The deepest compound loss since 1970 using year-end data. Think of it as the experience of the unluckiest investor in history who put their money in at the worst possible time.

While it’s true that you may not be so unlucky, it’s important to realize that you are not special and that this is what real people before you have dealt with. If the deepest drawdown is larger than your own risk tolerance, perhaps you should think twice about the portfolio. But if it’s something you can handle, then you can sleep well knowing you chose something you can be confident in even when times are tough.

One should note that because the number is based solely on year-end returns, it’s possible a portfolio experienced something even worse in the middle of a year.

Longest Drawdown

The longest time to permanently recover to the initial inflation-adjusted value. The chart tracks your actual purchasing power. Because the numbers are adjusted for inflation, the nominal account value may have recovered sooner than reported.

Astute observers may notice that some lines dive back below zero after briefly turning positive. That’s intentional, as a loss briefly interrupted by a head fake is still a loss. A drawdown is only declared resolved when the portfolio permanently recovers above its original value.

Ulcer Index

A composite measure of drawdown depth, length, and frequency. It was first described in The Investor’s Guide to Fidelity Funds by Peter Martin and Byron McCann, and the basic idea is to capture historical portfolio pain in a single number that’s far more informative than standard deviation. After all, a shallow drawdown that persists for years is not necessarily less painful than a sharp one that recovers quickly. You can read more about how it works in this article on the Ulcer Index. But long story short, it is a pretty decent measure of the total white area above each of those red lines.

Assumptions

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• All returns are adjusted for inflation and expressed in the home country’s currency.
• Portfolios are rebalanced annually, and returns include reinvested dividends.
• Returns ignore taxes and fund fees.
• Calculations cover every year since 1970 for the selected home country.
• Drawdowns are measured with year-end data, so losses in the middle of a year may have been deeper than shown.

Discussion

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Articles

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Insights that reference Drawdowns