Glossary
What is drawdown?
Updated Reviewed quarterly
Drawdown is the peak-to-trough decline in a fund's value, expressed as a percentage from the most recent high. Max drawdown is the largest such decline over a given period. Drawdowns measure the worst paper loss an investor has actually experienced — a more useful loss measure for buy-and-hold investors than statistical volatility.
Reading drawdown. If a fund hits NZ$100 in January, falls to NZ$70 by June, then rises to NZ$110 by December, the max drawdown for the year is −30% (peak NZ$100 → trough NZ$70). The fact that it ended up positive doesn't erase the drawdown — that's the loss someone holding through June actually saw.
Historical context. Broad US equity indices have experienced max drawdowns of about −55% (2008 GFC) and −34% (2020 COVID crash) in the modern era. The S&P/NZX 50 hit roughly −60% in the GFC. Even a "boring" total bond ETF like BND drew down about −18% in 2022 as US rates rose. Every asset class has drawdown risk; the question is how much your portfolio can tolerate.
Drawdown vs volatility. Volatility (standard deviation of returns) is a statistical measure — it treats up moves and down moves the same. Drawdown only counts the down moves. For most buy-and-hold investors, drawdown is the more useful number: it's the actual loss you'd have to live through to capture the long-run return.
For NZ investors. When choosing between funds with similar expected returns, the one with the smaller historical max drawdown is usually less psychologically taxing to hold through a crisis. Single-country funds (e.g. FNZ for NZ-only) tend to have larger drawdowns than globally-diversified funds (e.g. KGM) for the same risk premium.
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