Maximum drawdown

The largest peak-to-trough fall a portfolio has experienced.

A portfolio that fell from 100 to 62 suffered a 38% drawdown, and recovering from it requires a 61% gain.

The measure is closer than volatility to what an investor actually experiences, because it describes the worst moment rather than the average dispersion. It is also the number that determines whether a strategy survives, since clients and lenders leave during drawdowns rather than during volatility.

Recovery arithmetic is the part worth internalising. Losses and gains are not symmetric.