WINNING INVESTMENTS with EXCHANGE-TRADED FUNDS
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definition is the maximum percent decline from a price peak until the next price above the peak.
Drawdowns in the system occur on average about every nine months and last about ten weeks peak to trough. When they end, they have offered a lower risk opportunity to begin trading. Patience to wait to begin pays off.
The worst rolling six-months period scored -11%, starting in January and ending in July 2004, while the S&P500 gave up only -3% during the same time. The chances of loss greater than -11% in any one-month period are one out of 200.
Knowing in advance
the size and duration of risks like this strengthens your ability to expect and tolerate similar events in the real-world future.
In practice, drawdowns will have no effect whatsover on rerturns. They are a measure of price volatility. Their only effect on the trader or investor is a purely psychological one. Even then, they will rarely, if ever, have full impact because they pertain only to specific peak processes. Only If you are foolish enough to ignore prudent entry points in taking a position and buy at the maximum highest price, will you suffer the angst and anger of poor timing while you fretfully await exectution or redemption.
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