What is a drawdown?
A drawdown is the fall in portfolio value from its previous peak. If your account was $10,000 and is now $7,000, the drawdown is 30%. Maximum drawdown is the deepest such fall over the whole period.
The math matters: to recover from a 50% drop you need a 100% gain. The deeper the drawdown, the longer the recovery.
What is volatility?
Volatility shows how much the value swings. Here it is the spread of monthly returns, scaled to a year. Low volatility means a calm line, high volatility means a roller coaster. Bitcoin's is several times higher than stocks'.
What is diversification?
Diversification means spreading money across assets that behave differently. When one falls, another may hold steady or rise, so the portfolio as a whole swings less. It does not remove risk entirely: in a severe crisis almost everything can fall at once.
Why does it matter?
- Risk is not a number, it is your behavior. Most people lose money not because the market falls, but because they sell at the bottom.
- Pick a mix you can sleep with. If the loss in money already scares you, reduce the share of risky assets.
- Calm assets smooth the ride, and lower growth too. That is the price of calm.
- Time horizon matters. Money you need in a year or two should not sit in assets with deep drawdowns.
Past results do not guarantee future returns. Educational purposes only, not financial advice.