Volatility and maximum drawdown

Volatility describes how much the value moves; drawdown describes how far it has already fallen.

These are the two most-read risk measures, and they do not say the same thing.

Annualised volatility

It is the standard deviation of the fund's returns, put on an annual basis. Volatility of 3 % is typical of a short bond fund, 6 to 10 % of a diversified fund, 15 % and above of an equity fund. The higher it is, the wider the range of possible one-year outcomes.

Maximum drawdown

It is the largest drop recorded from a peak to the trough that followed, over the observed period. A fund can show moderate volatility and still have suffered a severe drawdown during a particular market episode.

Why look at both

Volatility is an average: it smooths over extreme episodes. Drawdown shows the worst case actually lived through and how long it took to recover the previous level. For capital you may need on a specific date, drawdown is often the more telling measure.

Link with horizon

The longer the investment horizon, the more an investor can absorb high volatility and wait out a drawdown. That is the logic behind the risk-profile / horizon pairing used by the screener.

Explore the risk / return map →