What Is Max Drawdown, and How to Interpret It

Max drawdown answers: how much would you have lost if you'd bought at the worst possible moment?

How it's calculated

It's the largest decline from any historical peak to the subsequent trough, before the price recovers that peak:

• If a stock rose from 100 to 200 and then fell to 80, the max drawdown is −60%.
• The max drawdown is the worst of all such cycles over the period analyzed.

Why it's so useful

Unlike volatility, which is abstract, drawdown is intuitive: it's the real loss you would have lived through. If your portfolio has a −40% max drawdown, at some point you watched your capital fall 40% from its peak.

Many investors sell at the bottom of a drawdown, locking in the loss. That's why a portfolio with a smaller drawdown can be more suitable even with somewhat lower expected returns.

Reference levels

• < 10%: very conservative. Defensive, low-volatility portfolios.
• 10-25%: moderate. Typical of diversified S&P 500 portfolios.
• 25-50%: high. Common in individual stocks or concentrated portfolios.
• > 50%: extreme. High-risk stocks or severe market crises.

Check the max drawdown for any stock on its S&P 500 ticker page and see how it changes depending on the asset mix in the optimizer.

See your portfolio's drawdown →