Drawdown

If a portfolio climbs to a peak value and then falls before recovering, the drawdown is the magnitude of that decline, expressed as a percentage from the peak. Maximum drawdown refers to the largest such decline over a defined history. Unlike volatility, which averages fluctuations in both directions, drawdown focuses exclusively on the loss experience, making it closer to how most families actually feel risk in practice.

Drawdown matters deeply for wealthy families because large losses require disproportionately large subsequent gains to recover. A decline of a certain percentage requires a larger percentage gain just to return to the starting point, the arithmetic of loss recovery is asymmetric. This asymmetry is a central concern in capital preservation planning, particularly for families whose portfolios fund ongoing lifestyle expenses, philanthropy, or multigenerational obligations that cannot simply pause during a market recovery.

A hypothetical family who retired from business in a strong market year and immediately began drawing income from their portfolio would feel a severe early drawdown far more acutely than a family with a longer runway and no near-term spending needs. This sequencing effect, sometimes called sequence-of-returns risk, is why drawdown analysis is often considered alongside liquidity needs when constructing a portfolio. Advisors working with families at substantial wealth levels frequently use maximum drawdown alongside Sharpe ratio when evaluating managers.