Drawdown — What is Capital Decline?
What is drawdown (capital decline)? How to measure it, what values are normal and why max drawdown is crucial for risk assessment.
What is Drawdown?
Drawdown (capital decline) is the percentage decline in portfolio value from the last peak to the lowest point before recovery. It measures how much you lost from the best moment.
Formula
Drawdown = (Current value - Peak value) / Peak value × 100%
Example: Portfolio grows to 150,000 PLN (peak), then falls to 120,000 PLN.
Drawdown = (120,000 - 150,000) / 150,000 × 100% = -20%
Max Drawdown — The Most Important Risk Metric
Max drawdown is the largest decline from peak to trough in the entire portfolio history. It shows the worst scenario an investor experienced.
Historical Max Drawdowns
| Index/asset | Period | Max drawdown |
|---|---|---|
| S&P 500 | 2007–2009 | -56% |
| S&P 500 | 2020 (COVID) | -34% |
| WIG20 | 2007–2009 | -68% |
| Bitcoin | 2017–2018 | -84% |
| Polish Treasury bonds | 2021–2022 | -8% |
Why is Drawdown More Important Than Volatility?
Volatility (standard deviation) treats gains and losses equally. Drawdown measures only losses — what actually hurts the investor.
Mathematics of Loss Recovery
| Drawdown | Growth needed for recovery |
|---|---|
| -10% | +11% |
| -20% | +25% |
| -30% | +43% |
| -50% | +100% |
| -80% | +400% |
The larger the loss, the harder it is to recover. A 50% decline requires 100% growth — this can take years.
How to Use Drawdown in Practice?
- Risk tolerance assessment — if a -30% max drawdown won't let you sleep, reduce equity allocation.
- Strategy comparison — with similar returns, choose the one with smaller max drawdown.
- Safety cushion planning — you must survive drawdown without forced selling.
Recovery Time — How Long Does Recovery Take?
Max drawdown without time context is incomplete. Recovery time is the period from trough to return to previous peak:
- S&P 500 (2007–2009): drawdown -56%, recovery ~4 years
- S&P 500 (2020): drawdown -34%, recovery ~5 months
- WIG20 (2007–2009): drawdown -68%, recovery — still not recovered (as of 2026!)
How Freenance Can Help?
Freenance automatically calculates your portfolio's drawdown — you see current decline from peak and historical max drawdown. This helps assess real risk and adjust strategy to your tolerance.
Want full control over your finances?
Try Freenance for free