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Glossary

Drawdown

A drawdown is the decline in an investment's value from its highest previous level to a later low, usually expressed as a percentage of that peak.

What Is a Drawdown?

A drawdown measures how far an investment has fallen from its most recent peak before recovering. If a portfolio grows to a value of 100,000 and then drops to 80,000, it is in a drawdown of 20 percent. Drawdowns are used to describe the risk of losing money over time, not just the risk of a single day's price movement. They apply to individual stocks, funds, trading accounts, and entire portfolios.

How Drawdown Is Calculated

The percentage drawdown is measured against the highest value reached before the decline, not against the original purchase price. The formula is:

Drawdown = (Peak Value - Current Value) / Peak Value

Two related measures are often reported alongside it. The maximum drawdown is the largest peak-to-trough decline over a chosen period. The recovery period is the time it takes for the value to climb back to the previous peak. A large drawdown requires a bigger percentage gain to recover: a 50 percent loss needs a 100 percent gain to get back to even.

Why Investors Look at Drawdowns

Drawdowns show the emotional and financial strain an investment can create. An asset with high average returns may still have deep, long-lasting drawdowns that many investors would find hard to tolerate, leading them to sell at a loss. For this reason, drawdown figures are often compared with volatility and total return when assessing how an investment has behaved in the past.

Drawdown analysis is also common in risk management and in evaluating trading strategies, where the Sharpe ratio and standard deviation offer complementary views of risk-adjusted performance.

Limitations

Drawdown is a backward-looking measure. It describes what happened in a past period and does not predict future declines. The result depends heavily on the time window chosen: a fund may show a small maximum drawdown over five years and a much larger one over ten. Because drawdowns are measured from peaks, they also say little about the depth of losses that occur inside a longer decline.

Updated October 18, 2026. For general education only; not financial, tax or legal advice.

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Related Terms

Volatility

Volatility is a statistical measure of how much and how quickly an asset's price moves up or down over a given period, with higher volatility indicating larger price swings.

Total Return

Total return is the complete measure of an investment's performance over a period, combining price change with income such as dividends or interest and any reinvested payouts, usually expressed as a percentage.

Risk Management

Risk management is the process of identifying, measuring, and deciding how to limit or accept the possible losses that could affect an investment, portfolio, or business.

Sharpe Ratio

The Sharpe ratio measures how much return an investment earns above a risk-free rate for each unit of its volatility, using standard deviation as the measure of risk.

Standard Deviation

Standard deviation is a statistical measure of how widely a set of values, such as investment returns, spreads out around their average, with larger figures indicating greater variability and risk.

Maximum Drawdown (MDD)

Maximum drawdown is the largest percentage drop from a peak to a later trough in an investment's value before a new peak is reached, showing the worst loss an investor would have endured.