Maximum Drawdown
Maximum drawdown is the largest percentage drop of an investment from a peak to a subsequent low before a new peak is reached.
A drawdown measures any decline from a previous high. The maximum drawdown is the worst such decline over a given period. It shows how much an investor would have lost by buying at the worst possible time and selling at the bottom.
Example: a portfolio grows to $120,000, falls to $84,000 and later recovers. The drawdown is ($120,000 - $84,000) / $120,000 = 30%. Even if the portfolio ends the year higher, that 30% drop is part of its risk history.
Drawdowns are useful because they reflect what investors actually experience and remember. Recovery math is unforgiving: a 30% loss needs about a 43% gain to break even, and a 50% loss needs 100%. The time to recover, called drawdown duration, matters too.
Broad US stock indexes have experienced drawdowns of roughly 50% or more several times, including in 1929-1932, 2000-2002 and 2007-2009. Comparing maximum drawdown alongside returns and volatility helps investors judge whether a strategy's risk fits their tolerance.