r/investing
Time to drawdown recovery vs max drawdown
The author discusses the importance of time to drawdown recovery versus maximum drawdown in portfolio management.
I'm assuming most people focus on CAGR as a primary metric if younger and have time for their investments to grow. They may be less concerned (or unconcerned entirely) with drawdowns since ultimately growth is most important to them.
Others may focus on reducing max drawdowns if they're nearing retirement and can't afford to lose half their life savings in their 70s or 80s.
Has anyone focused on TIME TO DRAWDOWN RECOVERY? This is an interesting one to me. I realize this is most likely highly correlated with maximum drawdown, but then again it may not necessarily be. But let's say, hypothetically (exaggerated to illustrate the point):
Portfolio 1: same CAGR, max drawdown: 25%, time to recovery: 10 years
Portfolio 2: same CAGR, max drawdown: 95%, time to recovery: 2 years
I'm guessing more people than expected would take portfolio 2. That higher drawdown can be easier to stomach if you know it will recover more quickly than a lower drawdown that feels like it takes forever.
Would love to hear any thoughts or recommendations!
Time to recovery is useful, but the catch is you only know it \after\ recovery happens. You don't really know if it is a 2-year recovery or a 12-year recovery.
So max drawdown still matters: a 95% drawdown requires a 20x return just to break even, and many investors won't be able to handle it
Past performance does not guarantee future results. For those that are offended by any hint that history is useful in portfolio constructions, let me put it in the context of a stock market historian who likes to look at past portfolio allocations out of pure curiosity. If this historian were able to put together uncorrelated assets in a way that emphasized past CAGR and past time to drawdown recovery (but no emphasis at all in drawdown depth) what they would come up with.
Please check out "Ulcer Index".
I want to isolate time to recovery. Ulcer index includes the depth of the drawdown
Ulcer Index
Not quite. Ulcer index factors in depth of drawdowns. More curious if time to drawdown recovery alone may be more relevant to some and if anybody has looked into this further
I'm guessing more people than expected would take portfolio 2. That higher drawdown can be easier to stomach if you know it will recover more quickly than a lower drawdown that feels like it takes forever.
Except that if you're depending on that portfolio to pay the bills, you're screwed.
That and whenever the next drawdown happens, you don't know how long it will take to recover; just what past events have been like.
More so than the overall portfolio performance, there's a lot to be said for its components. The portfolio on the whole might be dragged down by one particular asset class, but if you've got something low/anti-correlated and can tap into that, you're in good shape.
All good points
The problem is when the drawdown happens you don't know how long it takes to recover.
True obviously you can never predict the future
There is a fund that I'm aware of that looked like 2 in 2021/2022 and if the 2023 rebound hadn't happened or took longer to happen than it did, that fund would probably had to have given up before the rebound happened.
You're also on Reddit, where tolerance for market volatility is far, farrrrrrrrrrrrrrrrrrrrr less than it used to be on here. You're talking about a 95% drawdown on a sub on Reddit where people go "OMG WHATS HAPPENING TO MY STOCK" and you look and it's down 3%.