Drawdown is simply how much money you lose from your highest profit point (peak) to your lowest point (trough) during a certain period of time. It’s a way to measure how much your portfolio has declined after it reached its highest value.
The simplest way to understand drawdown is to think of climbing a mountain. Imagine you climb to the top of the mountain (your highest profit), but then you start slipping down (losing money). The distance you fall from the top to your lowest point is called the drawdown.
The bigger the fall, the harder it is to climb back up — just like in investing, the deeper the drawdown, the harder it is to recover your money.
Example
Let’s say you invested $1000 in your portfolio with Bigness Capital.
In Month 1, your investment grows to $1200 (your highest point or peak).
In Month 2, the market dips, and your portfolio drops to $1100 (your lowest point or trough).
The difference between the highest point ($1200) and the lowest point ($1100) is called a drawdown.
You lost $100 from your highest point.
This means your drawdown is $100 or 8.33%.
Why Is Draw Down So Important To Investor?
The importance of drawdown comes down to understanding the numbers and, more importantly, understanding yourself and your psychology. Rather than thinking from a perspective of gain, it challenges you to think from a perspective of loss — what are you willing to lose in order to gain?
The symbiotic relationship of all things in life expresses the constant cycle of ups and downs — yin and yang; profit and loss; rise and fall. The key to wealth management is risk management. This concept applies not only to finance but also to life. How do you spend your time, and what opportunities have you lost while spending it? After all, we don’t just spend time — we pay attention.
Drawdown shifts your perspective from merely chasing profits to managing losses. It forces you to think in terms of time. If you experience a tough month, how long will it take for your portfolio to recover? This is the true essence of drawdown — understanding how to protect your capital, your time, and ultimately, your wealth.
Investing vs. Trading: A Psychological Game
Investing and trading aren't just about making money — they’re about understanding yourself and your psychology. The reality is, the more money you have, the less risk you need to take to achieve a stable monthly income. Conversely, the less money you have, the more risk you’ll need to take in order to reach that same financial goal. This creates a psychological divide between the wealthy and those still building wealth.
Investors tend to think long-term, focusing on gradual, sustained growth, while traders often think day-to-day, seeking quick profits. Although their objective — making money — is the same, their psychology and approach to risk are vastly different.
At the core of both approaches is time. Only through time can we measure change, and that’s where drawdown becomes essential. It allows you to quantify how much your portfolio has declined and how long it will take to recover, enabling you to align your risk tolerance with your psychology.
Understanding drawdown is the key to not only protecting your capital but also protecting your peace of mind. Managing risk is not just about numbers — it’s about mastering yourself.
How Can Drawdown Help You Make Financial Decisions?
It all comes down to the power of choice. The more information we receive, the more we believe we are making an informed decision—but in reality, too much information can lead to confusion and overwhelm.
In most aspects of life, our preferences are shaped by years of self-awareness and experience. The same applies to financial decision-making. The best financial decisions come from simplifying the process rather than overcomplicating it.
Drawdown helps by providing clarity. It allows you to understand how long it will take your portfolio to recover from a loss, giving you a clear picture of your risk tolerance and financial resilience.
Understand yourself. Understand drawdown. Understand your decision-making.
Make Smarter Financial Decisions with Bigness Capital
Financial success isn’t just about making money—it’s about understanding risk, your psychology, and the power of informed decision-making. Drawdown helps you measure potential losses and recovery time, ensuring you manage risk effectively.
At Bigness Capital, we help you simplify complex financial concepts and build a strategy tailored to your goals. Book a free consultation today and take control of your financial future.
