Max drawdown explained: the risk number that matters most

Max drawdown is the largest fall from a peak to a trough in the value of an investment, before a new high is reached. It answers the question every investor actually cares about: *how bad did it get?*

If you bought at the top of the S&P 500 in October 2007 and held, your investment was worth 55 % less by March 2009. That −55 % is the S&P 500's maximum drawdown since 1993.

How to calculate max drawdown

The formula is simple:

Example: a portfolio rises from €100,000 to a peak of €150,000, then falls to €90,000 before recovering. The drawdown at the bottom is (90,000 − 150,000) ÷ 150,000 = −40 %. Note that the starting value does not matter; only the peak does.

Two related numbers complete the picture:

• Drawdown duration — how long the fall lasted, from peak to trough.
• Recovery time (or time under water) — how long it took to get back to the old peak.

The S&P 500's biggest drawdowns

S&P 500 (SPY) total return, weekly closes, 1993–2026.

Other markets have been far more extreme: the Nasdaq-100 fell −83 % from 2000 to 2002 and needed until 2015 to recover; Bitcoin has had three drawdowns of more than 70 %; even long-term US Treasuries — often called safe — fell −48 % from 2020 to 2023.

Why max drawdown matters more than volatility

Volatility (standard deviation) measures how much returns wiggle around their average, up and down alike. Max drawdown measures the one thing that ends investment plans: a deep, lasting loss.

• It is what investors experience. Nobody sells because returns had a high standard deviation. People sell after a −40 % fall.
• It captures the asymmetry of losses. After −50 % you need +100 % to recover. Volatility treats a −50 % month and a +50 % month as equally risky; your portfolio does not.
• It reveals risks volatility hides. A strategy that sells insurance can show low volatility for years and then lose half its value in a week. Max drawdown catches that; volatility over a calm period does not.

Max drawdown across asset classes

Higher returns usually come with deeper drawdowns — but not always. The chart above plots, for every market in the Research Terminal, the return per year against the worst fall since the start of its data. Markets in the top-left corner gave more return per unit of pain.

How to use max drawdown

• Set your stock allocation by drawdown, not by return. If you can live with a −25 % fall of your total portfolio, and stocks can fall −55 %, you should hold no more than about 45 % in stocks — unless you use a strategy that limits the stock drawdown itself.
• Compare strategies on three numbers. Return per year (CAGR), risk-adjusted return (Sharpe ratio) and max drawdown. A strategy that beats on return but has a deeper max drawdown may be one you will not stick with.
• Look at recovery time too. A −30 % fall that recovers in five months is very different from one that takes four years.
• Remember that the next drawdown can be deeper. A historical max drawdown is the worst so far, not the worst possible.

Reducing max drawdown

Diversification across assets that behave differently, holding cash, avoiding leverage and systematic trend-following are the main tools. Trend-following targets drawdowns directly: by stepping aside when a market is in a downtrend, it has historically avoided the deepest part of long bear markets, at the cost of some return in choppy markets.

Try it on your own numbers with the free drawdown recovery calculator, and see the current drawdown of 30 markets in the Research Terminal's Drawdowns tab.

Frequently asked questions