Drawdown

Drawdown captures the lived experience of loss in a way that annualized return figures simply cannot. If a portfolio reaches a high-water mark — the highest value it has ever recorded — and then falls in value before recovering, the percentage decline from that peak to the lowest point is the drawdown. A portfolio that drops from an illustrative $10 million to $7 million has experienced a 30% drawdown, regardless of what its long-term average annual return looks like.

For family offices, drawdown analysis matters for reasons beyond mathematics. Families often have spending needs, philanthropic commitments, or business obligations that cannot pause while a portfolio recovers. A deep drawdown during a period when the family must liquidate assets to fund distributions can permanently impair the portfolio — a concept sometimes called sequence-of-returns risk. This is one reason families typically pair drawdown analysis with their spending policy and liquidity management frameworks.

A common confusion is treating maximum drawdown as a complete picture of risk. Two portfolios can share an identical maximum drawdown while differing dramatically in how long each took to recover — the "drawdown duration." Families and their advisors typically examine both dimensions together. The investment policy statement sometimes includes explicit drawdown tolerance thresholds to guide rebalancing or risk-reduction decisions during market stress.