Portfolio
Drawdown
Reviewed
How to calculate drawdown
Drawdown measures the decline from the previous peak, not simply the return over an arbitrary period. The formula is (current value - peak value) / peak value × 100. A portfolio that falls from $100,000 to $75,000 is in a 25% drawdown. The drawdown ends only when the portfolio reaches a new high.
Drawdown and recovery math
Losses and recoveries are asymmetric because the recovery begins from a smaller base.
| Drawdown | Gain needed to recover |
|---|---|
| 10% | 11.1% |
| 20% | 25% |
| 30% | 42.9% |
| 50% | 100% |
This is why limiting severe losses can matter more than maximizing returns in every rising market.
Maximum drawdown
Maximum drawdown is the deepest peak-to-trough loss over a chosen history. It helps compare strategies with similar average returns but very different paths. The measurement is sensitive to the selected start date, frequency of observations, cash flows, and whether income is reinvested. A short backtest can miss the environment that would expose a strategy's real downside.
Drawdown versus volatility
Volatility measures the dispersion of returns in both directions. Drawdown measures the depth and duration of losses from a prior peak. A strategy can show modest daily volatility yet suffer a long, grinding drawdown, so investors often examine both measures alongside liquidity and concentration.
How investors use drawdown
Historical drawdown is not a forecast, but it is useful for position sizing and stress testing. Ask whether a loss larger than the historical maximum would force you to sell, breach a margin requirement, or derail a near-term goal. If so, the position may be too large even when its expected return looks attractive.
Example
A 50% drawdown requires a 100% gain just to return to the starting value, showing how costly deep losses are.
Related terms
Drawdown — FAQ
What is Drawdown?
A drawdown is the peak-to-trough decline in the value of an investment or portfolio, measuring how far it has fallen from its highest point.
Can you give an example of Drawdown?
A 50% drawdown requires a 100% gain just to return to the starting value, showing how costly deep losses are.
What is a 20% drawdown?
It means the investment or portfolio is 20% below its previous peak. A rise of 25% from the lower value is required to recover that loss.
When does a drawdown end?
A drawdown ends when the investment reaches or exceeds the peak from which the decline began. Until then, it remains in the same drawdown episode.
Is maximum drawdown the same as risk?
No. It captures one important dimension of risk but does not measure liquidity, permanent impairment, leverage, concentration, or the chance that future losses exceed the historical record.
What is drawdown duration?
Drawdown duration is the time from a prior peak until the investment recovers to that peak. Two strategies can have the same maximum loss but very different recovery times.
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