Analyze the significance of the maximum drawdown

Return is directly proportional to risk. The higher the return, the greater the risk. When choosing a fund, you should not only look at investment performance, but also consider the risks of the fund, and try to choose funds with a more advantageous return-to-risk ratio. The editor has compiled the meaning of the maximum retracement here for your reference. I hope you will gain something from the reading process!

What is the maximum retracement?

The maximum retracement refers to the maximum retracement of the yield when the net value of the product reaches its lowest point at any historical point in the selected period. Simply put, it is the maximum retracement of the yield at a certain point in the past. The fund's largest decline in a period of time.

The following is a trend chart of the unit net value of a certain fund product in the past month. During this period, the total *** experienced two major declines: the first time was from 2.0179 yuan on July 13 to 7 It fell to 1.8717 yuan on July 16, a drop of about 7.25%; the second time it fell from 2.0961 yuan on July 23 to 2.0010 yuan on July 24, this time it dropped by about 4.54%. Then by definition, the fund's maximum drawdown in the past month is 7.25%.

The maximum drawdown of a fund is related to the investment target, investment strategy and investment style of the fund manager. Generally speaking, the drawdown of stock funds will be greater than that of bond funds; different fund managers have different attitudes towards risk. If fund manager A pays more attention to the margin of safety in valuation, fund manager B is more inclined to downplay valuation and value the future of stocks. Growth, so with a high probability, the drawdown of the fund managed by A will be relatively small.

It should be noted that the quality of market conditions also affects the extent of fund drawdowns, so when we compare the maximum drawdowns of two funds, we must compare them in the same time period. Generally, in a bear market, it is easier to observe the fund manager's control over the retracement of net value, so the time frame of the investigation is best to include the downward cycle.

The significance of maximum drawdown for fund investment

When the market generally rises, funds also rise, and investors may have difficulty judging whether the risk level of a certain product is suitable for them.

However, after extending the cycle, the market will inevitably fall, causing fluctuations in the fund's net value, and the fund's maximum drawdown indicator reflects the worst possible situation after buying a certain fund. When we select funds, if we find that the maximum drawdown index of a fund exceeds our tolerance, we need to invest in this product with caution.

How does the maximum drawdown guide fund investment?

Many times, funds achieve good performance, but holders do not make money. One of the important reasons is that they only look at the performance of the fund and do not fully consider its volatility. When the market fluctuates, it is normal for the fund's net value to retrace, but if the retracement is too large and beyond your tolerance, you will often feel anxious and make some irrational investment behaviors.

So, before investing in funds, you must first correctly understand your risk tolerance. For example, just imagine how much the fund you purchased is acceptable to fall over a period of time, and then choose the appropriate fund type and position based on your own risk preference. Many financial management platforms now require users to do a risk assessment before investing. Xiaoguang recommends that you fill it out carefully. The assessment can help you better understand your risk tolerance level.

If the risk-return characteristics of a fund match our risk preferences, then when the market falls, the fluctuations of this fund will be within the tolerable range and have less impact on our mentality. Therefore, Easier to hold for the long term. Even when a fund draws back, because we know enough about the fluctuation characteristics of this fund, if we have sufficient funds, we can choose to increase the position appropriately to reduce the cost of holding positions and create more room for future profits.

In the past two years, the returns of funds purchased by many investors have generally been unsatisfactory. What caused the substantial losses of most funds? Regarding these questions from investors, Li Ying, an analyst at the Shanghai Securities Fund Evaluation Center, pointed out , First of all, the fund product is essentially a basket of securities investment portfolios, and the fund's return performance is inseparable from the performance of the underlying underlying market. In the market environment where the stock market continues to decline, it is difficult for stock funds, hybrid funds, etc. that mainly invest in stocks to achieve positive returns. When the stock market rises, most equity funds tend to achieve positive returns. Therefore, it is impossible for the fund to create a myth and create high positive returns under the continuous market decline in recent years.

From the perspective of long-term performance, in most cases, the overall performance of funds is better than that of individual investors. Especially in bull markets and volatile markets, the comparative advantages are more prominent. For example, in 2006 and 2007, more than 80% of stock funds achieved returns of more than 100%, while the proportion of individual investors was less than that of nearly 50% of stock funds in 2012, which achieved returns of 5% to 30%. Returns, and surveys show that more than 50% of individual investors have losses ranging from 5% to 50%. Therefore, funds are still a better investment tool for individual investors to participate in the capital market.