Peak-to-Valley Drawdown

From the highest high to the lowest low. Whoa, are we trying to be poetic all of a sudden? Are we describing Britney Spears circa 2007? No, but that’s what we’re looking at when we talk about a “peak-to-valley drawdown”: the percentage decline in an investment fund from its highest high (its peak) to its lowest low (its valley) after that peak.

If we’ve had the fund for a long time—and we’re predominantly talking about mutual funds and money market accounts here—we’ll probably see multiple peak-to-valley drawdowns over the year.

So why is this important? Two reasons. First, it helps us gauge the risk level of a particular fund. If there are a ton of peak-to-valley drawdowns over a somewhat short period of time, or if those drawdowns are really really big, then we know we’re looking at a more volatile investment option. Second, the longer a fund takes to recover from a peak-to-valley drawdown, the worse it tends to perform overall. So if we’re scoping out a money market account with a spectacularly long drawdown recovery period, that might be indicative of other issues with the fund.