What is a drawdown?
A drawdown is the fall from a portfolio's peak value to a later low, before it recovers.
A drawdown is the drop in value from a high point to a later low point. If a portfolio reaches its highest value and then falls before climbing again, the size of that fall, measured from the peak, is the drawdown.
Measured from the top
Drawdown is counted from the most recent peak, not from where an investor started. A portfolio that has doubled and then slips back a little is still well above its starting value, yet it is in a drawdown relative to its high. This is why drawdowns can feel painful even when overall results are positive.
Depth and recovery
Two things describe a drawdown. The first is depth: how far the value fell from the peak. The second is recovery time: how long it took to get back to the old high. A fall of a given size needs a larger rise to recover, because the rise is measured on a smaller base. A shallow fall that recovers quickly is a very different experience from a deep one that takes years.
Why drawdowns matter for goals
Goals have dates. If a large drawdown happens close to the date a goal falls due, there may be little time to recover before the money is needed. If it happens years earlier, there is more time. For people drawing money out, such as retirees, selling during a fall locks in the loss, which can make recovery harder. This is one reason timing and liquidity are looked at alongside the size of a portfolio.
What a stress test shows
A stress test applies a hypothetical fall to a portfolio and shows what would happen to its value and to each goal. It does not predict that a fall will occur. It simply lets a household see, before anything happens, which goals would still be on track and which would not.
How Mandala shows this
The Simulator in Mandala lets a user drag a slider to apply a market fall and see the effect on the portfolio and on each goal, including whether the goal would still be funded. Historical scenarios can also be replayed. These are illustrations of what could happen under stated assumptions, and they are not predictions.
Watch
From the Mandala channel on YouTube. The video shows the Mandala feature itself; the explainer above is the educational part. Watch on YouTube
See it live in Mandala
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Educational content only, not investment advice. Examples are illustrative, and nothing here is a recommendation to buy, sell or hold any product. Investments are subject to market risks.