QQQ (Invesco QQQ Trust which tracks the Nasdaq-100 Index) did even worse on the drawdown. This means while investors investing in S&P 500 might expect an annualized return of 8.87% over the long term, the investors should also expect that it is typical to see an investment at any given time being down more than 40% once over 15 years, more than 30% once every decade and more than 10% every 2.5 year. You might see this kind of stats many times before, but what it does not tell us is during such time you also faced your investment being halved once, being down more than 30% for 3 times and also being down more than 10% for 12 times. This means an investment of $10,000 on SPY during such a period will result in $117,100 today (2022–02–15) or 1071% total return. Historically, over the past 29 years, SPY (SPDR S&P 500 ETF Trust) has had an annualized return of 8.87%. It’s the fact that we cannot avoid drawdowns, so it is the matter of how much. By setting an appropriate expectation, we believe that investors can relieve such pain easily although avoiding all the pains might be difficult. Thus, the question is what the investors should expect during the downturn, and why it is normal to face such a drawdown. In this case, we will approach this by expectation management. Watching an investment drop down 50% from $100k to $50k can be very painful, and we can guess what emotional investors might do next.Īvoiding panic is easier said than done. While tracking drawdown can be beneficial to improve one’s investment skill, it can be disastrous if investors are emotionally attached to it. Many investors consider risk as the permanent loss of capital, and drawdown is one metric that has the nearest definition to that. It is used to infer the downside risks of an investment. What is drawdown?ĭrawdown is a decline of investment value from the peak which is typically measured in percentage value. If you also think that tracking this is useful and you want to track it regularly and effortlessly, visit us at Portseido. If you find this article helpful, don’t forget to share it with your fellow investors. In this article, we discuss what drawdown is, how intelligent investors can learn from it and what investors should expect during the crash. While it is useful to track such metrics, it is not a good practice to react to it in an emotional way which might ruin your portfolio returns. Drawdown is one of the most important metrics in measuring risk of your investment strategy.