Why it matters
Averages can conceal the path of losses. Drawdown describes a realised decline within a defined observation window.
A worked example
A portfolio moves from £100 to £120, then £90, then £110. Its maximum drawdown is (120 − 90) ÷ 120 = 25%.
Illustrative example · simplified assumptionsA common mistake
Measuring the fall from the original amount rather than the relevant peak.
Where the idea needs care
Historical drawdown is not a limit on future losses. This example assumes no external cash flows.
Apply the idea
Explain this concept using a different example from your spending, work, business or a policy debate. State what stays fixed and what could change the result.
See the supporting infographic
The written explanation above is the main lesson. This image offers another way to remember it.
Sources and further study
Examples and explanations by Alibomics. Numeric illustrations are not current market quotations.