Silent Killers of Stock and Bond Investors 50+
The comments below are an edited and abridged synopsis of an article by Chris Vermeulen
“Recently I was shocked after speaking with five different investors on the phone. These investors have been involved in the markets for many years, and they trade their accounts. Surprisingly, not a single one of them knew what drawdowns were, as there are two types. In short, it is how we gauge an overall investment strategy’s risk level so you know if a given approach fits within your risk tolerance.”
A drawdown measures how much an investment or trading account is down from its highest point. It is used to quantify the extent of loss suffered by an investor or trader during a period of market decline. A drawdown is expressed as a percentage. Also, the maximum drawdown (MaxDD) is the largest percentage drop from the account’s highest point to its lowest point over the life of the strategy, which in laymen’s terms, is the largest loss.
Drawdowns are a part of investing and trading and can significantly affect an investor’s financial health and retirement lifestyle, but it takes this type of self-discipline for success.
Large drawdowns can take years to recover, which can be devastating for investors nearing retirement or already retired. This is because there is a second type of drawdown: The time it takes to recover from the value drawdown. When an investor experiences a significant drawdown, it can take years for their account to recover to its previous level, which can delay or destroy one’s retirement plans.
Up for discussion: Max drawdown comparison for buy-and-hold vs. tactical investing; two types of drawdowns—value and time; the S&P 500 Index ; Nasdaq tech bubble and growth stock; drawdowns kill investors in three different ways; and tactical investing—consistent growth strategy (CGS).