Drawdown in Trading

The cover story published in the previous issue emphasising the value of dividend stocks was indeed insightful. You have included a line stating, “Drawdown in case of high dividend paying stocks is lower as compared to non-dividend paying stocks.” Can you throw light on the meaning of drawdown in case of trading?

- Mihir Raj

Editor Responds: Thank you for the appreciative words. We are glad you liked the cover story published in the previous issue. A drawdown refers to how much an investment or trading account is down from the peak before it recovers back to the top. A drawdown is a measure of downside volatility. As the high dividend paying stocks are less volatile and are low beta stocks, the drawdown tends to be lower. Usually, the small-cap stocks and Mid-Cap stocks have a deeper drawdown and hence are not acceptable to low-risk investors. High-risk investors tend to prefer small caps for above-average returns and are usually aware of the larger drawdowns. It is important to understand the average drawdown of the equity markets before one enters the market. In our cover story, we have attempted to explain that the average drawdown in high dividend yielding stocks is less than the high beta and non-dividend paying stocks. Most of the time, we have observed that investors participate in the equity markets without being prepared for the drawdowns. It is not only prudent but extremely important for positive portfolio performance to estimate the probable drawdown.

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