What Is Max Drawdown?
Maximum drawdown is the largest peak-to-trough decline an investment has suffered: the worst loss you would have experienced buying at the highest point and watching it fall to the lowest that followed.
How it is measured
Drawdownt = Valuet / Highest Value so far − 1
The max drawdown is the most negative value that series ever reaches. Example: a portfolio peaks at $100,000, falls to $62,000, and later recovers. Its max drawdown is −38%, no matter what happens afterwards.
Why it matters more than volatility
Volatility measures wobble; drawdown measures pain. It answers the question that actually breaks investors: how bad did it get before it got better? Two portfolios with the same average return can have very different drawdowns, and the one that halves is the one people abandon at the bottom.
Recovery is asymmetric
Losing X% requires gaining more than X% to get back to even:
- −20% needs +25% to recover
- −33% needs +50%
- −50% needs +100%
- −80% needs +400%
This asymmetry is the core argument for diversification: avoiding the deepest holes matters more than catching every rally. The diversification finder searches for assets that historically cut a portfolio's drawdown.
Historical examples (S&P 500, total return)
- 2007-2009 financial crisis: about −51% on monthly closes
- 2000-2002 dot-com bust: about −45%
- March 2020 COVID crash: about −34% in five weeks
- 2022 rate shock: about −24%, while long-term bonds fell over 30%
You can see the exact drawdown curve of any portfolio in the free backtester, which charts drawdown alongside growth for every backtest.
Frequently asked questions
What is a normal max drawdown for stocks?
Deep ones are normal. The S&P 500 fell about 51% in 2008-2009 (55% intraday from peak), 45% in 2000-2002, and 34% in weeks during March 2020. Long-term stock investors should expect a 30-50% drawdown at least once a decade.
How much gain does it take to recover from a drawdown?
More than the loss: recovery is asymmetric. A 20% drawdown needs +25% to break even, a 50% drawdown needs +100%, and an 80% drawdown needs +400%.
How can I reduce max drawdown?
Diversify into assets that fall at different times: bonds, gold, and other low-correlation holdings. In backtests, adding bonds to an all-stock portfolio has historically cut drawdowns far more than it cut returns.
Past performance is not a guarantee of future results - see the disclosures in the footer and the methodology.