A drawdown is measured as the percentage drop in a fund or portfolio from the top to the bottom of a negative swing. Drawdowns can only be calculated when the price finally recovers; if you don't wait until then to measure it, you don't really know if the drawdown is finished.

This is a graph of the TSX (Toronto Stock Exchange Composite index) from January 1989 to December 2006, the period of the backtest of our Canadian Equity Fund. The TSX reached an all-time high on September 1, 2000 of 11,389. It then dropped, with minor rallies along the way, to a low of 5,695 on October 9, 2002, a drop of 49.99%. The drawdown ended on January 3, 2006 when the TSX finally rose above 11,389. The drawdown lasted more than 5 years from the first drop to full recovery and at its low point had lost 49.99% of its value.

That's what you would have experienced if you had invested in an index fund based on the TSX.

The S&P 500 did worse. On March 24, 2000, the S&P 500 hit an all-time high of 1,527.46. It proceeded to sink to 776.76 on October 9, 2002 (the same day as the TSX hit its low) with a loss of 49.15% (almost exactly the same loss as the TSX). However, the S&P didn't recover until May 30, 2007, almost a year and a half after the TSX recovered.

That's what you would have experienced if you had invested in an index fund based on the S&P 500.

There are other ways of looking at drawdowns:

• A "3 month drawdown" is the worst total change in value – measured from the value at the start of the 3-month period to the value at the end of the 3-month period among all rolling three month periods – during a specified time. It's as if you looked at the value of a stock (or fund, or portfolio), went on a three month vacation, and then looked at the value on your return. If there are 36 months in your horizon, there will be 33 different 3-month rolling average numbers. The lowest of these 33 numbers is the "3 month drawdown".
• A "90 day drawdown" is the worst total change in value in all rolling 90 calendar days during a specified period, measured as of the end of each trading day.
• You can create similar measures across any interval. Be sure to specify whether you are referring to end of month data or daily data, and what your time horizon is ('since inception', 'over the last 5 years').

If you want to see a raft of drawdown statistics for our funds as well as the markets, select "Drawdowns: Martial Capital vs. the Market" on the left.