RISK LAB

Drawdown

Drawdown measures how far value falls from a prior high before recovering. It matters because losses are not only mathematical. They affect behavior, liquidity, client confidence, suitability, and whether the user can stay with the plan.

Meaning

What it means

Drawdown is the decline from a peak value to a lower value over a period of time.

Protection

What it protects

It protects against underestimating how painful a loss can become even before the position is permanently closed.

Mechanics

How it works

Drawdown grows through price decline, volatility, leverage, concentration, poor timing, or repeated losses. The larger the decline, the more recovery is required just to return to the starting point.

Risk Signals

How it shows up

Look for clients who say they accept risk but react strongly to temporary declines, accounts near withdrawal needs, leveraged exposure, or strategies with sharp historical declines.

Action

What to do

Compare the drawdown to the user's tolerance, capacity, objective, and time horizon. Decide whether the plan still fits or needs adjustment.

Avoid

What to avoid

Do not treat unrealized loss as irrelevant. A temporary loss can still force bad decisions if the account cannot wait.

Risk Review Frame

Read the risk before you approve the action

Use this topic to separate a normal decision from a risk decision. A risk decision needs facts, fit, limits, and documentation before it can be treated as clean.

  • How far did value fall?
  • Can the user wait?
  • Is leverage involved?
  • Does the plan still fit after the decline?

Topic Checklist

Before you mark this complete

  • Define the risk in plain English.
  • Identify what could go wrong for the client, account, product, or market condition.
  • Connect the risk to capacity, tolerance, time horizon, liquidity, or documentation.
  • Choose whether the situation is clean, incomplete, needs adjustment, or requires escalation.
  • Confirm the review action before moving to the next topic.

Ready Check

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