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Updated 2mo ago.
Updated 2mo ago.
Maximum drawdown measures the maximum loss an investment suffered between a peak and a trough over a given period. It expresses the worst-case loss scenario an investor could have experienced by buying at the peak and selling at the bottom. It is a key measure of downside risk.
During the 2008-2009 crisis, the S&P 500 experienced a maximum drawdown of approximately -55%. This means that if you had invested $10,000 at the peak (October 2007) and sold at the bottom (March 2009), you would have had roughly $4,500 left. VEQT.TO didn't exist then, but a similar portfolio lost about 40-50% — then fully recovered within a few years.
Knowing a fund's historical drawdown helps you assess whether you could "endure" such a decline without panicking and selling. If seeing your $100,000 portfolio drop to $50,000 would keep you up at night, a 100% equity portfolio may not be right for you. Maximum drawdown is a more concrete risk tolerance test than any questionnaire.