Stock Portfolio Drawdowns and Risk
A drawdown measures a decline from an equity peak to a later trough. It describes the path of an investment’s value and can matter even when its long-run average return is positive.
How it works
Drawdown=(trough−peak)/peak, usually quoted as a positive loss percentage. Recovery return=loss/(1−loss) when loss is expressed as a fraction. Specify whether values include dividends, fees, deposits and open positions; external cash flows can distort a naive account-value calculation.
Worked example
A portfolio peaks at 10,000 and falls to 7,000: a 30% drawdown. Recovering from 7,000 to 10,000 requires 3,000/7,000≈42.86%. A further 10% fall from 7,000 leaves 6,300, taking the total decline from the peak to 37%, not 40%.
Amounts, prices and scenarios are fictional teaching examples. They exclude any effects not explicitly stated and are not trade recommendations.
Limits and common mistakes
The worst historical drawdown is not a maximum possible future loss. Liquidity and cash needs can force sales before recovery. Margin calls and correlated positions can make an investor’s experience worse than a broad-index chart suggests.
Knowledge check
Can a 30% gain reverse a 30% loss?
Read the explanation
No. Different starting bases matter. After a 30% loss, a 30% gain leaves 91% of the starting value, before costs.
References and further reading
- SEC Investor.gov: stocks, ownership and risks
- SEC: company filings and financial reports
- SEC: beginners’ guide to financial statements
These sources explain the underlying concepts and specifications. They do not endorse QBMFX Academy. Check the relevant market, protocol version and reporting rules before applying an example.