This investment insight explores a more refined method of managing and mitigating loss.

  • What is drawdown and why is it a better approach to managing and mitigating loss?
  • How does drawdown-based asset allocation work?
  • What are the ways to implement the drawdown framework?

Risk is a central theme in the investment world, a counterweight to investors’ desire for return. The irony is that, given the enormous role and usage of the term, the concept of “risk” is typically not well defined and can even be subjective, making risk arithmetic challenging to understand if not outright misleading. Return, on the other hand, is easily defined by the growth or decline in the market value of a portfolio. As detailed below, standard deviation, the broadly used default risk metric, has significant limitations. This leads us to embrace the concept of “drawdown” as a more intuitive and therefore useful approach to understanding and tracking investment risk.

Please see important disclosures at the end of the article. 

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