Max Drawdown

Maximum Drawdown measures the single worst decline an investment experienced from a previous peak value to its subsequent lowest point, expressed as a percentage. For example, if a portfolio grows to $100,000, then falls to $65,000 before eventually recovering, its maximum drawdown over that period is -35%.

Max Drawdown is one of the most intuitive risk metrics because it answers a question every investor actually asks: "what's the worst it's ever gotten?" A strategy with a strong average return but a severe historical max drawdown may be much harder to hold onto in practice than one with a slightly lower average return and a shallower worst-case decline, because investors who panic-sell during a large drawdown lock in losses and often miss the recovery entirely.

Max Drawdown says nothing about how long the decline lasted or how long recovery took — a portfolio can have a smaller max drawdown but take far longer to recover than one with a deeper but shorter decline. That's why it's usually looked at alongside the cumulative return chart itself, not in isolation.