What it is
A drawdown is how far a portfolio has fallen from its highest point. The maximum drawdown is the largest such fall over a period, measured from a peak to the lowest point before a new peak.
Drawdown = (current value - previous peak) / previous peak
Why it matters
Maximum drawdown is the loss you would actually have had to live through. Most investors abandon a strategy during a deep drawdown, often near the bottom. Knowing the historical worst case helps you choose something you can stick with.
Losses need bigger gains
| Loss | Gain needed to recover |
|---|---|
| -10% | +11% |
| -25% | +33% |
| -50% | +100% |
| -75% | +300% |
| -90% | +900% |
This is why leveraged strategies are so dangerous. See Volatility decay and Leveraged ETFs explained.
Historical drawdowns
| Asset | Period | Max drawdown |
|---|---|---|
| S&P 500 | 2007 to 2009 | About -55% |
| Nasdaq 100 | 2000 to 2002 | About -83% |
| S&P 500 | 2020 (COVID) | About -34% |
| TQQQ (3x Nasdaq) | 2021 to 2022 | About -80% |
Using it
- Compare it with return using the Calmar ratio.
- Look at how long the recovery took, not just the depth.
- Remember a backtest shows the worst drawdown so far; the future can be worse.
Questions
What is a good max drawdown?
It depends on what you can hold through. Broad stock indexes have fallen 30 to 55% in bad bear markets; a strategy promising much less should be checked for how it was tested.
See also
- Calmar ratio The Calmar ratio compares annual return with the worst drawdown. How to calculate it, what a good value is, and why drawdown-based risk matters.
- Volatility decay What volatility decay (beta slippage) is, why leveraged ETFs lose value in choppy markets, a worked example, and the formula that estimates the drag.
- Position sizing How much to put in each investment: equal weighting, conviction weighting and risk-based sizing, with simple rules that keep one mistake from sinking a portfolio.
- How to read a backtest Which numbers in a backtest report to trust, which to question, a checklist for spotting unrealistic results, and how to compare a strategy with a benchmark.
Pages that link here: 9 Sig, Building your investing knowledge, CAGR (compound annual growth rate), Compound interest, Investing FAQ, Leveraged ETFs explained, Leveraged strategies compared, Sharpe ratio, Skewness of returns, Staying invested through downturns, What is backtesting?, Win rate and payoff ratio
Last updated September 30, 2026. Education only, not investment advice.