Drawdown and recovery
Survival matters more than one-period return.
Drawdown and recovery
| Concept | Explanation | |---|---| | Peak | Highest portfolio value before decline. | | Trough | Lowest value before recovery. | | Maximum drawdown | Largest peak-to-trough decline. | | Recovery period | Time required to regain the previous peak. | | Underwater period | Time the portfolio remains below its prior high. | | Risk of ruin | Probability that losses prevent continuation of the strategy. |
Key idea: Survival matters more than maximizing one-period return. Severe drawdowns reduce both capital and decision flexibility.