Maximum Drawdown

Maximum drawdown is the largest peak-to-trough drop an investment has experienced before recovering, expressed as a percentage. It captures the worst loss an investor would have endured if they bought at the top and held through the bottom. It is a vivid, real-world measure of downside risk.

Use maximum drawdown to understand the worst-case pain a strategy has historically inflicted and whether you could stomach it without selling. A deep drawdown also takes more to recover, since a 50 percent loss requires a 100 percent gain to break even. Compare drawdowns across investments to gauge resilience, remembering past drawdowns may be exceeded in future.

If a fund rises to 200 dollars, falls to 120 dollars, then recovers, its maximum drawdown is 40 percent. An investor needs to know they could have watched 40 percent of their money disappear before deciding to hold it.