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 is the worst it has ever gotten? A strategy with a strong average return but a severe historical drawdown may be much harder to hold onto in practice than one with a slightly lower average return and a shallower worst case, because investors who panic-sell during a large drawdown lock in losses and often miss the recovery entirely. In this sense, a strategy's max drawdown is really a measure of how much emotional pressure it puts on the person holding it.

By itself, Max Drawdown says nothing about how long the decline lasted or how long the recovery took — a separate idea captured by drawdown recovery time. A portfolio can have a smaller max drawdown but take far longer to climb back than one with a deeper but shorter decline. That is why it is usually examined alongside the cumulative return chart itself, not in isolation.

Drawdowns matter most for anyone drawing income from a portfolio, because a deep loss early in retirement combines with withdrawals to do lasting damage — the problem known as sequence-of-returns risk. Diversified, lower-drawdown strategies such as the All Weather or Permanent Portfolio exist largely to keep this number small, accepting lower long-run growth in exchange for a shallower worst case.