A "drawdown" is the peak-to-trough decline of an investment. In simple terms, it is the measurement of how much your portfolio value drops during a market correction. While drawdowns are psychologically painful, they are the price an investor pays for long-term equity returns.
Volatility vs. Risk
Financial education often confuses volatility with risk. Volatility is the upward and downward fluctuation of price. Risk is the permanent loss of capital. A disciplined mutual fund portfolio is designed to handle massive volatility without triggering permanent risk.
The Shock Absorber
Proper asset allocation acts as a shock absorber. When the equity portion of your portfolio is in a drawdown, the debt portion often remains stable or even appreciates, cushioning the overall impact. This prevents you from "hitting the wall" and making emotional decisions that destroy wealth.
- Recovery Math: A 20% drop requires a 25% gain to break even. A 50% drop requires a 100% gain. Preventing deep drawdowns is mathematically superior to chasing high returns.
- Stress Testing: Understanding how your portfolio would have behaved during 2008 or 2020.
- Emotional Threshold: Your allocation should never exceed your ability to stay calm during a 20% pullback.
Engineering Resilience
At Divino Capital, we prioritize drawdown protection over speculative gains. Our Decision Lab tools are designed to map your actual emotional risk capacity before we ever suggest a single fund.