Drawdown

The drawdown shows the largest percentage loss an investment has suffered from a peak to the next low.

Maximum drawdowns of important indices:

• MSCI World: −57% (October 2007 to March 2009)
• S&P 500: −57% (financial crisis), −34% (coronavirus), −86% (Great Depression 1929)
• DAX: −73% (dotcom 2000–2003), −55% (financial crisis), −40% (coronavirus)
• Nasdaq: −78% (dotcom bubble)
• Bitcoin: −83% (2022), −84% (2018)

Recovery time:

• Financial crisis 2008: the MSCI World needed 5.5 years to get back to its old high
• Coronavirus crash 2020: only 5 months – the fastest recovery in history
• Dotcom 2000: the Nasdaq needed 15 years to get back to its old high

Why the drawdown matters so much:

• Test your risk tolerance: could you sit through a −50% drawdown without selling?
• With €100,000 in your portfolio: −50% = only €50,000 left. You have to be able to cope with that emotionally!
• Asymmetry: after −50% you need +100% just to get back to zero

The asymmetry of drawdowns:

• −10% loss → needs +11% recovery
• −25% loss → needs +33% recovery
• −50% loss → needs +100% recovery
• −75% loss → needs +300% recovery