Which was worse? It probably depends on a number of things like your age, your net worth, the actual dollar values lost, and when you need the money from your investment account. A drawdown of 25% that takes a long time to recover might be far worse for you than a drawdown of 40% that recovers quickly. The bear that started in March of 2000 saw accounts get cut nearly in half, and spent over 7 years losing money and then trying to recover losses to get back to even. The bear that started in 2007 had a larger drawdown magnitude, seeing a nearly 57% decline, but the recovery back to even happened almost 2 years quicker. Index investors in the S&P 500 have seen 2 major bear markets in the last 20 years. The below table shows the magnitude of those drawdowns and how long the recovery was before investors were able to start making new investment gains. Loss of money is risk, and loss of money can be measured by a concept called drawdown. Drawdown measures how far an investment account (or market, index, ETF, stock, etc.) has fallen from its previous high value. Drawdowns of -10% to -20% are generally considered "corrections" while drawdowns of greater than -20% are known as bear markets. This article will try to convince you that real risk is drawdown, and not volatility as modern finance wants you to believe.ĭrawdown has two components, its magnitude (amount of decline) and its duration (amount of time it was below the high price). Many forget that the duration of drawdown is also important. 36 and their account is down 32% for the year. Do you think they call their money manager concerned about their standard deviation? Of course not, they just lost 32% that is what they are concerned about. What is risk? The sterile laboratory of modern finance wants you to believe it is volatility. They say that volatility is defined as standard deviation. I have opposed that academic mentality often in these articles. If you use standard deviation it means you also believe the markets are random and normally distributed. Anyone who believes that probably also believes in astrology, Fibonacci series, and a host of other magic tricks. Most investors know what risk is when they open their annual account performance statement and see they have a standard deviation of.