Drawdown and risk-adjusted return

Return without risk context is half a sentence. These two ideas supply the other half.

Drawdown

Drawdown is the drop from a peak in the account to the following trough — the worst stretch of losing ground before a new high. The maximum drawdown is the deepest such fall on record.

It answers the question that return alone hides: how bad did it get along the way? A strategy that gained 40% but suffered a 60% drawdown would have wiped out most people emotionally and financially before the recovery arrived. Ask yourself honestly whether you could have held through the worst drawdown shown — most people overestimate this badly.

Risk-adjusted return

A risk-adjusted return measures gain per unit of risk taken, not gain alone. The well-known Sharpe ratio divides return by volatility; the Sortino ratio focuses on downside volatility only. Higher is better, and it lets you compare a calm 20%-a-year strategy against a wild one fairly.

Why it changes everything

Two providers can both show "+50% a year". One did it smoothly; the other lurched through stomach-churning swings and a near-blow-up. The headline is identical; the experience — and the survivability — is not. Always pair every return figure with its drawdown. A return quoted without its risk is a number designed to flatter, not to inform.