Glossary
Drawdown
A drawdown is the fall from a peak to a trough before recovery - the max drawdown is the worst ride your portfolio ever printed. It measures the pain, not the average.
What it is
A drawdown is the percentage fall from a portfolio's highest point to its lowest point before a recovery. The max drawdown is the largest such fall over the period measured, and it is the number behind every super fund's risk label. The ASX 200 fell roughly a third in five weeks in early 2020, more than half between 2007 and 2009, and roughly a fifth through 2022. A term deposit has never printed a drawdown; a single ASX stock can print 50 percent or worse.
The distinction that matters is drawdown versus volatility. Volatility is the size of the daily swings; drawdown is the depth of the hole the swings produced. A fund can average 15 percent volatility for a decade and still print a 35 percent max drawdown, because the bad years stack. Drawdowns recover - the ASX has recovered from every one in its history - but the time underwater varies from months to over a decade, and the portfolio that sold at the trough never got the recovery.
Key takeaways
- A drawdown is the fall from a peak to a trough; the max drawdown is the worst one printed.
- The ASX 200 fell more than half in the GFC, a third in five weeks in 2020.
- Drawdowns recover; the time underwater ranges from months to over a decade, depending on the fall.
- Sizing the allocation to the max drawdown you can sit through is the decision that matters.
- Volatility measures the swings; drawdown measures the hole the swings left - related, not equal.
How it works
The measurement runs one way. Track the portfolio's high-water mark - the highest balance reached - and measure every later balance against it. The drawdown is the percentage below the high-water mark, and the max drawdown is the deepest reading over the whole period. A $100,000 portfolio that climbs to $140,000 and falls to $98,000 is in a 30 percent drawdown, regardless of the fact it is still up on the original deposit.
The second mechanism is the recovery, and the arithmetic is asymmetric. A 20 percent drawdown needs a 25 percent rise to recover; a 33 percent fall needs 50 percent; a 50 percent fall needs 100 percent. The time underwater compounds the damage: the ASX 200 price index fell more than half between 2007 and 2009 and did not regain the 2007 peak for over a decade - with dividends reinvested the wait was roughly four years. The drawdown risk calculator runs the fall-and-recovery arithmetic at any size.
The third mechanism is the portfolio-level version. A single high-beta holding can print a 60 percent drawdown while the diversified index prints 30 - the aggregate drawdown is what the holder actually carries. The volatility entry covers the swing measure, and the risk tolerance entry sizes the allocation against the drawdown rather than the average.
Why it matters
For an Australian reader, the drawdown is the number behind the super fund labels - high-growth options are calibrated to 20 percent-plus drawdowns, balanced options to 10 to 15, conservative to under 10. The labels are drawdown statements, and the honest question is which hole you can sit through without selling. The drawdown risk calculator puts numbers on your own mix. The emergency fund entry covers the cash buffer that keeps the drawdown from becoming a forced sale.
A colleague named Brent (yes, that Brent) sized his super by the average return and moved everything to the highest-growth option in 2021. He met the 2022 drawdown at full size. He switched to the conservative option after the fall, which sold the recovery and locked the drawdown in as behaviour. The highest-leverage thing most Australians can do is size the allocation to the worst realistic drawdown, keep the buffer in cash, and leave the mix alone through the fall.
Real-world examples
A $140,000 portfolio that falls 30 percent
The high-water mark is $140,000 and the trough is $98,000 - a 30 percent drawdown, even though the portfolio still sits above the original $100,000 deposit. Recovery needs a 42.8 percent rise, which is roughly five years at a 7.5 percent return. Selling at the trough makes the loss permanent; holding lets the arithmetic run its course. A 20 percent drawdown on the same portfolio would need a 25 percent rise and roughly three years. The drawdown risk calculator runs the arithmetic at any fall size.
The 2007 to 2009 drawdown and the time underwater
The ASX 200 fell more than half between the November 2007 peak and the March 2009 trough. The price index did not regain the 2007 high for over a decade; with dividends reinvested the recovery took roughly four years. A portfolio worth $100,000 at the trough needed a 100 percent rise to reach its old peak. The investor who capitulated in late 2008 and re-entered in 2012 bought the recovery at prices well above the ones he sold at - the time underwater, priced in decisions.
The other drawdown: the account-based pension version
The word means something different in retirement: an account-based pension must draw down a legislated minimum each year - 4 percent under 65, rising to 14 percent at 95 and over. A $600,000 pension pays at least $24,000 a year at the minimum rate, and the rate scales with age. Drawdown there is a rule about withdrawals, not a market fall - the same word, two entirely different risks. The minimum pension drawdown calculator runs the rates at any age and balance.
Common mistakes
Mistake: Sizing the allocation by the average return instead of the drawdown.
Why it bites you: The average return tells you nothing about the hole you will carry; the 2022 drawdown arrived at full size for every high-growth option. Brent's switch after the fall sold the recovery.
Mistake: Assuming the worst drawdown is already in the history books.
Why it bites you: The max drawdown is a backward-looking statistic, and the next one can be deeper. Size to the worst realistic fall, not to the worst recorded one.
Mistake: Selling at the trough because the drawdown feels permanent.
Why it bites you: The ASX has recovered from every drawdown in its history, and the trough is only knowable in hindsight. The sale converts a temporary hole into a permanent loss.
Mistake: Running a portfolio with no cash buffer into retirement.
Why it bites you: Drawing income through a 30 percent drawdown sells assets at the bottom and compounds the loss - the sequence risk that shrinks the balance permanently. Three to six months of essentials funds the gap instead.
Ivy's take
I spent an afternoon running my own portfolio's worst three drawdowns through the drawdown risk calculator so you don't have to, and the reading was humbling: the max drawdown is the only number in the file that predicts how I would actually behave at 2 AM. The average return is the brochure; the drawdown is the terms and conditions.
Brent sized by the average and met the hole at full size, then sold the recovery to stop the pain. The drawdown did not cost him; the behaviour on top of it did. Size the allocation to the fall you can sit through, keep the buffer in cash, and let the hole be a hole.
Related jargon, defined
- Volatility
- The size of the swings around the average - the daily experience of the same risk.
- Bear market
- A sustained fall of 20 percent or more from a high.
- Recovery
- The rise needed to return to the high-water mark - 25 percent after a 20 percent fall.
- High-water mark
- The highest balance a portfolio has reached - the reference point for the drawdown.
- Risk tolerance
- How much swing and depth an investor can hold through without selling.
- Minimum drawdown
- The legislated annual pension payment from an account-based pension, starting at 4 percent.
Frequently asked questions
What is a drawdown in investing?+
A drawdown is the percentage fall from a portfolio's peak to its lowest point before recovery. The max drawdown is the deepest such fall over the period measured.
How long does the ASX take to recover from a drawdown?+
The 2020 drawdown of roughly a third recovered inside a year; the 2007 high took over a decade on the price index and roughly four years with dividends reinvested. Recovery time is never knowable in advance.
What drawdown can my super fund deliver?+
Check the option's risk label: high-growth options are calibrated to 20 percent-plus drawdowns, balanced options to 10 to 15 percent. The [drawdown risk calculator](/tools/drawdown-risk-calculator/) prices your own mix.
What is the difference between a drawdown and volatility?+
Volatility measures the size of the daily swings; drawdown measures the depth of the hole the swings produced. A fund can average 15 percent volatility for a decade and still print a 35 percent max drawdown.
What does drawdown mean in an account-based pension?+
It means the legislated minimum annual withdrawal: 4 percent under 65, rising with age to 14 percent. The same word describes withdrawals in retirement and market falls while investing.
Disclaimer: This information is general in nature and does not constitute financial or legal advice. Always consult a qualified professional for your specific situation.
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Ivy Sinclair-Wren
Financial Chaos Analyst
Ivy Sinclair-Wren is a Financial Chaos Analyst covering investing, AI, wealth psychology, and the emotional consequences of opening finance apps during market crashes. Based in Melbourne, she specializes in demystifying the Australian tax code and helping users navigate the intersection of spreadsheet logic and human irrationality.