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Anonymous

01 Dec 2020

∙

General Investing

Which is more important to you, annual returns or maximum drawdown for your investing strategy? Which strategy would you choose?

Strategy A: 18% annual returns, 15% volatility, -25% max drawdown
Strategy B: 19% annual returns, 14% volatility, -30% max drawdown

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Andy Chan

01 Dec 2020

It really depends on the objective of the investment and the timeframe.

If you are approaching the end of your investment timeframe, e.g. need to pay your children's university fees soon, then adjusting your portfolio to a lower max drawdown might be preferable since you might need to liquidate a portion of your portfolio for whatever expenses you need to pay.

On the other hand, if you've just started investing and won't be touching the sum until 10 years later, then the -30% drawdown is tolerable. Heck, it would even be a good time to invest more.

P.S. My answer assumes I'm investing in a broad market ETF. If it is an individual stock, there are other factors that could explain the drawdown. In that scenario, I might liquidate my holdings if the fundamentals are no longer strong.

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