Shorter recovery times will have lower UIcer Index, even if they experience the same absolute MAXDD. Ulcer Index, as defined by Peter Martin and central to MFO’s ratings system, does capture both the MAXDD and recovery time, but like most indices, it is most easily interpreted when comparing funds over same time period. What I find “knocks me out of a fund” in a down market is the fund’s inability to bounce back. Typically the more aggressive the fund the more likely it is to have a higher MAXDD. MAXDD or Maximum Drawdown is to me only half of the story. Long time MFO board contributor Bee posted recently: The difference, however, is in the drawdown level itself.ĭuring the past 20 years, bonds have recovered much more quickly, even after the financial crisis. Perhaps more surprising is that aggregate bonds experienced a similar duration, before the long bull run. Since 1962, SP500’s worst recovery time is actually a modest 53 months. Morningstar advises that investors in equity funds need “investment horizons longer than 10 years.” Since 1956, the SP500 has fallen nearly 30% or more eight times. As evidenced in “ Ten Market Cycles” from our April commentary, 20% drawdowns are quite common. Typically, for equity funds at least, the descent from peak to valley happens more quickly than the ascent from valley to recovery level.Īn individual’s risk tolerance and investment timeline certainly factor into expectations of maximum drawdown and recovery time. In the case of maximum drawdown (MAXDD), the figure below depicts recovery time from peak. In the book “ Practical Risk-Adjusted Performance Measurement,” Carl Bacon defines recovery time or drawdown duration as the time taken to recover from an individual or maximum drawdown to the original level. Originally published in August 1, 2014 Commentary
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