What is Max drawdown?

Maximum drawdown is the largest peak-to-trough loss over a period — the worst moment an investor would have lived through. A maximum drawdown of −50% means that at some point half of the money was gone on paper.

The maths of losses is unforgiving: after −50% you need +100% to get back to where you were; after −80% you need +400%. Deep drawdowns also take years to recover and are when most investors give up and sell at the worst time.

For many investors, maximum drawdown is the most important risk number, because it describes the pain that decides whether a strategy can actually be followed.

By Dr. Harry Hamann