What is maximum drawdown?

Maximum drawdown (MDD) is the largest percentage fall of an investment from a peak to a later low, before a new peak is reached. It answers a very concrete question: what is the worst loss an investor would have suffered by buying at the worst possible moment and selling at the worst moment afterwards?

The formula

At every point in time $t$ , the drawdown is the distance below the highest value reached so far:

\text{DD}_t = \frac{V_t}{\max_{s \le t} V_s} - 1

The maximum drawdown is the deepest of these values over the whole period:

\text{MDD} = \min_t \, \text{DD}_t

It is zero or negative, and it is often quoted as a positive percentage: "a maximum drawdown of 34%".

A simple illustration

A portfolio's value moves as follows: €10,000, €12,000, €9,000, €11,000, €8,400, €13,000.

The highest value before the lows is €12,000. The first low, €9,000, is a drawdown of 25%. The portfolio recovers to €11,000 but not to the old peak, and then falls to €8,400:

\text{MDD} = \frac{8{,}400}{12{,}000} - 1 = -30\%

The drawdown is measured from €12,000, not from €11,000, because €11,000 never set a new peak.

The sample portfolio's own time-weighted return, with its deepest fall marked: −24.7%, from December 2024 to April 2025. These are that portfolio's figures, not yours.

Why it matters

It is how losses feel. Few investors experience "volatility"; everyone experiences seeing their portfolio 30% below its high. Whether one could have held on through the worst historical drawdown is a better test of risk tolerance than any statistic.
Recovery is asymmetric. After a fall of size $d$ , the gain needed to get back to the peak is:

\text{Required gain} = \frac{1}{1 - d} - 1

A 30% drawdown needs a 43% gain to recover; a 50% drawdown needs 100%.

Typical values

Broad global stock markets fell by around 50–60% in the worst crises of recent decades, after 2000 and in 2008–2009, and by about a third in the short crash of early 2020. Balanced portfolios with a large share of high-quality bonds usually fell far less — although in 2022 stocks and bonds fell together, and many balanced portfolios had their worst year in decades.

Limits

It depends on the period measured. A maximum drawdown taken from five calm years says little about what a real crisis could do.
It is a single event. It says nothing about how often smaller drawdowns occur or how long they last; drawdown recovery time fills that gap.
It complements volatility rather than replacing it. Two portfolios with the same volatility and return can have very different drawdowns, and the other way round.

A worked example

Worked through on a sample portfolio. The figures below are that portfolio’s, not yours.

What is my maximum drawdown?

Your maximum drawdown is -25,49% over 112 days, from 2024-12-18 to 2025-04-09. The largest value drop from peak during that drawdown was -23.138,95 € and the all-time high before it was reached on 2026-08-29.

See these numbers for your own portfolio

Floreo works out every figure on this page from your own holdings — returns, risk, allocation, currencies — and the assistant explains them the way this page does. Import from your broker, or try it on the sample portfolio first.

Start Demo

The demo opens straight away on a sample portfolio — no account needed.