Maximum drawdown is the largest fall in the value of an investment or portfolio, measured from a peak down to the lowest point that follows, before a new peak is reached. It is shown as a percentage of that peak. If a portfolio drops 40% from its high and later falls no further, 40% is its maximum drawdown. The formula is (lowest value - peak value) ÷ peak value, and you repeat it for every peak in the period and keep the worst result. It tells you how deep the worst loss was, which average return and volatility do not show.
Worked example
A portfolio is worth $100,000 at its peak, falls to $70,000, climbs back to $90,000, then falls to $60,000 before recovering. The first fall is ($70,000 - $100,000) ÷ $100,000 = -30%. The second fall is measured from the same $100,000 peak, because $90,000 never beat it: ($60,000 - $100,000) ÷ $100,000 = -40%. The maximum drawdown is the worse of the two, -40%. To get back to $100,000 from $60,000 it needs a gain of $40,000 ÷ $60,000 = 66.7%. This is why recovery is harder than the fall: a 50% loss needs a 100% gain, because $100,000 that drops to $50,000 must double to return.
Why it matters
Maximum drawdown shows what the worst stretch actually felt like in money terms, which is often what decides whether a person can stay invested. Two portfolios can have the same average return and very different worst falls. The recovery math is the key lesson: the deeper the fall, the faster the gain needed to get back grows (-20% needs +25%, -50% needs +100%, -80% needs +400%). The limits matter too. It looks only backward at one period, so a calm stretch can hide a bad one that has not happened yet, it depends on the dates you pick, and it says nothing about how long the recovery took. A large drawdown is a question to look into: what drove it, and could you have lived through it without selling?
Frequently asked questions
It is the biggest fall from a peak to the lowest point after it, shown as a percentage of the peak, before a new high is reached. A portfolio that went from $100,000 to $60,000 at its worst had a maximum drawdown of 40%.
Because the gain is measured on a smaller base. $100,000 that falls 50% becomes $50,000, and getting back to $100,000 means adding another $50,000, which is 100% of what is left. The same logic makes -20% need +25% and -80% need +400%.
No. Volatility measures how much returns swing around their average, up and down. Maximum drawdown measures only the single worst fall from a peak, so it answers a different question: how bad did it get at its worst?
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Educational use only. This tool provides estimates for informational purposes and does not constitute financial, investment, tax, or legal advice. Results are based on inputs you provide and mathematical models, they do not guarantee future performance. Always consult a qualified financial adviser before making investment decisions.