Drawdown
Definition
Drawdown refers to the decline in the value of a portfolio or investment from its peak to its subsequent lowest point before a new peak is reached. It is usually expressed as a percentage and is a key measure of downside risk.
Why It Matters to Investors
- Captures actual investor experience by measuring how much wealth was lost from peak to trough
- More intuitive than volatility when assessing risk, it shows worst-case scenarios
- Drawdowns hurt twice: financially and psychologically, often leading to poor decisions
- Recovery is nonlinear: a 50% loss requires a 100% gain to break even
- Essential for comparing strategies with similar returns but different risk profiles
The TiltFolio View
Drawdowns are the true test of any strategy. At TiltFolio, we believe managing downside is more important than maximizing upside. Investors rarely quit during periods of low returns, they quit during sharp losses.
Traditional portfolios like 60/40 can suffer drawdowns of 30% or more in major crises. In contrast, both TiltFolio systems are designed to manage drawdowns effectively. TiltFolio Adaptive adapts to changing market regimes with trend-following signals that aim to reduce exposure to falling assets before drawdowns deepen. TiltFolio Balanced uses strategic diversification across asset classes with different economic sensitivities to minimize drawdown magnitude.
Drawdowns can't be avoided entirely, but they can be managed intelligently. That's where both TiltFolio systems add value.
Real-World Application
• During the 2008 financial crisis, a typical 60/40 portfolio lost over 30%, while trend-following strategies cut losses by rotating into safer assets.
• In 2022, both stocks and bonds fell sharply. Portfolios that included commodities or used dynamic allocation systems experienced smaller drawdowns.
• A 20% drawdown may require a 25% gain to recover — but a 50% drawdown needs a 100% gain. Avoiding large losses is mathematically and emotionally crucial.