Sometimes stock-market research reports refer to something known as “drawdowns.” But it’s not always clear what the term means, because it’s often ill-defined and it’s used in at least a couple of different ways.
In its simplest form, it’s Wall Street-speak for “You lost money.”
“It’s a fancy way of saying the market value of your account or asset declined,” says Chuck Lieberman, chief investment officer at New Jersey-based Advisors Capital Management. “Instead of saying your stock fell in value, you had a drawdown.”
The term is sometimes defined as the percentage change from the peak of an asset’s value to its trough. For instance, at the start of the Covid-19 pandemic the SPDR S&P 500 (SPY) exchange-traded fund, which tracks the S&P 500 index, saw a drawdown of around 32% between Feb. 10 and March 20, 2020. It rebounded over the rest of the year.
Investors can use information about drawdowns to help make decisions about their portfolio allocations, based on how much risk they can tolerate and how much return they want to target.