Drawdown and Recovery
A drawdown is the fall from a peak to a low. The deeper the fall, the bigger the gain needed just to get back to where you were.
- Drawdown = how far a value has fallen from its previous high.
- Gain needed to recover = 1 ÷ (1 − loss) − 1, so losses hurt more than equal gains help.
- The worst fall and the time to recover matter as much as the average return.
The maths of recovery
The deeper the fall, the bigger the gain needed just to get back to the start, which is why controlling the size of losses matters so much:
- A 10% fall needs an 11% gain to recover.
- A 20% fall needs 25%.
- A 30% fall needs 43%.
- A 50% fall needs 100%.
- A 70% fall needs 233%.
Real examples
In 2008, Nifty 50 fell about 60% from its January peak to its October low and took around two years to get back. In 2020, it fell about 38% in roughly two months, then recovered in under a year. Individual stocks and small caps often fall much more than the index.
How to use drawdown
- Compare funds or strategies by their worst fall, not only their return.
- Ask whether you could have held on through that fall in real life.
- Look at recovery time: some funds take years to regain a high.
Common mistakes
- Assuming a fund that fell 40% only needs to rise 40% to recover.
- Judging risk by volatility alone. Two funds can have similar volatility and very different worst falls.
- Using a short history that missed a real bear market.
Common questions
How is drawdown calculated?
Drawdown = current value ÷ highest value so far − 1. The maximum drawdown is the deepest of these over a period.
How much gain do I need after a 25% loss?
About 33%. The formula is 1 ÷ (1 − 0.25) − 1.
What is a normal drawdown for Nifty?
Falls of 10% to 15% happen in most years or two. Falls of 30% or more have come a few times a decade, as in 2008 and 2020.