Maximum drawdown explained: how deep can an investment fall?

A drawdown is any decline from a previous high. The maximum drawdown is the deepest of those declines over a chosen period — the worst loss an investor would have suffered by buying at the top and selling at the bottom. Unlike volatility, which treats ups and downs alike, drawdown focuses only on the pain.

That is why many investors find it the most intuitive risk measure. Volatility of 20% is abstract; 'this fund once lost 35% from its peak and took three years to recover' is not.

Track the running peak; at each point measure how far the value sits below it, and keep the worst reading:

Drawdown               = (current value − running peak) ÷ running peak
Max drawdown           = the most negative drawdown in the period
Gain needed to recover = 1 ÷ (1 − |drawdown|) − 1

Example: a portfolio peaks at 200, falls to 120 and then recovers. Its maximum drawdown is (120 − 200) ÷ 200 = −40%. To get back to 200 from 120 it needs to rise 80 ÷ 120 ≈ 66.7%. The price report on our asset pages shows the maximum drawdown inside the selected window as well as the current distance from the high.

Because losses and gains compound, the climb back is always steeper than the fall: −10% needs +11%, −20% needs +25%, −50% needs +100% and −80% needs +400%. Large drawdowns can therefore take years to recover. In the 2007–2009 financial crisis the S&P 500 fell roughly 57% from peak to trough, and Bitcoin has gone through several declines of more than 70%.

Investors also look at how long drawdowns last — how long a holding stayed 'underwater' — and at ratios such as the Calmar ratio (annual return ÷ maximum drawdown), which ask how much return you were paid for the worst pain.

Maximum drawdown depends heavily on the period you look at: a fund launched after a crash can show a flattering figure simply because it has never lived through one. It also records a single event and ignores how often smaller drawdowns happened.

Most importantly, it is not a limit. An asset that has 'only' fallen 30% so far can fall 60% in the next crisis. Use historical drawdowns to test whether you could live with similar or worse losses — and size positions accordingly.