Explaining Drawdowns: An ADCC Framework for Communicating Losses with Clarity and Trust

Abstract

Drawdowns are among the most emotionally charged moments in portfolio management‚ yet the language that advisers use to explain them to clients is often improvised and counterproductive. This article develops a four-step framework, ADCC (acknowledge, diagnose, contextualize, commit) to help communicate peak-to-trough losses in a way that is technically accurate, psychologically attentive, and easy to understand. We start by defining key drawdown concepts and classifying drawdowns into four types: systematic, strategy-specific, factor/style, and idiosyncratic. Next, we outline and illustrate four recurring communication failures: obfuscation, normalization, blame-shifting, and the forecast trap. Finally, we show how the ADCC framework can be adapted for three settings: individual client conversations, investment committee presentations, and written disclosures. We conclude with recommendations for implementation and suggestions for future research on how improved drawdown communication may affect client trust and retention. The framework is intended as a practical communication tool and as a foundation for future empirical research on how drawdown explanations shape investor understanding and trust.