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Understanding Investment Risk and How to Measure It

Investment risk refers to the possibility of losing money. One important metric to determine investment risk is the max drawdown. Simply put, it measures the maximum amount an investment has lost from its highest peak.

For example, if an investment has a peak value of $10, 000 but then drops to $7, 000, its max drawdown is $3, 000 or 30%.

Max drawdown is important because it reflects the potential magnitude of losses an investor could face with an investment. The higher the max drawdown, the riskier the investment.

This measurement can help investors make decisions that align with their risk tolerance. Some investors may be comfortable with a high max drawdown investment, while others prefer a lower max drawdown.

When making investment decisions, it’s important to consider max drawdown, along with other factors such as historical returns and volatility. Diversifying investments across different asset classes may also help manage overall risk.

Max drawdown is a key metric to consider when evaluating investment risks. It provides insight into the potential loss an investor could experience and can help align investment decisions with individual risk tolerance.

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