Drawdown.
A definition, in plain English — with the books that teach it.
What it means
A drawdown measures the decline in a portfolio's value from a previous peak to a subsequent trough, expressed as a percentage. It captures the loss an investor would have experienced if they bought at the top and held through the bottom. Drawdowns matter because losses compound asymmetrically — a 50% decline requires a 100% gain to break even. Risk-aware managers monitor drawdown depth, duration, and recovery time alongside standard volatility metrics.
Example
A portfolio peaked at $200,000 in January, fell to $150,000 by June, then recovered to $220,000 by December. The drawdown was ($200,000 − $150,000) / $200,000 = 25%. The portfolio needed a subsequent 33% gain just to return to the prior peak.