Portfolio & RiskGlossary
Drawdown
A drawdown is a fall in value from a previous peak, shown as a percentage. Plain-English definition, how maximum drawdown is measured, and a worked example.
Also called: draw-down, peak-to-trough decline, peak-to-valley drawdown, maximum drawdown
Quick answer
A drawdown is a decline in an investment's or account's value from a previous peak, usually expressed as a percentage of that peak. The maximum (or worst peak-to-valley) drawdown is the largest such fall over a period.
What does drawdown mean?#
U.S. commodity-pool regulations define a draw-down as losses experienced by a pool or account over a specified period. They define the worst peak-to-valley draw-down as the greatest cumulative percentage decline in month-end net asset value during any period before the earlier value is equaled or exceeded[1]. Those definitions come from Commodity Futures Trading Commission (CFTC) rules for certain U.S. funds; rules differ by country, but the peak-to-valley idea is used to describe any portfolio.
To calculate a drawdown, divide the current value by the highest value so far and subtract from 1. The deepest result over the period is the maximum drawdown.
What does a drawdown look like with numbers?#
Worked example
An account that rises, falls and recovers
The account peaks at $12,000, falls to $9,000 and later reaches a new high of $12,500. The maximum drawdown is 25.00%, and getting from $9,000 back to $12,000 needs a 33.33% gain.
| Step | Account value | Peak so far | Drawdown |
|---|---|---|---|
| Start | $10,000 | $10,000 | 0.00% |
| New high | $12,000 | $12,000 | 0.00% |
| Fall | $9,000 | $12,000 | 25.00% |
| Partial recovery | $11,000 | $12,000 | 8.33% |
| New high | $12,500 | $12,500 | 0.00% |
Figures computed in code from the stated inputs; rounded to the nearest cent or tenth.
What is a real-world example?#
Researchers at the Federal Reserve Bank of St. Louis wrote that after peaking on Feb. 19, 2020, the S&P 500 dropped to 66% of its peak by March 23 — a drawdown of about 34% — and stood at 115% of that pre-crisis peak a year later[2]. One fast recovery does not predict the next: a future drawdown could take much longer to recover, or might not recover within your time horizon.
Where will you see this term?#
Drawdown figures appear in many fund and portfolio reports, and U.S. commodity-pool rules use the term formally. They complement volatility, which measures how much returns swing rather than how far they fell. For the full picture, including why a 50% fall needs a 100% gain to recover, read volatility and drawdowns explained, and see risk tolerance and time horizon for why the timing of a drawdown matters.
Sources
Numbers in brackets in the text point here. Grade A = primary source (regulator, statistics agency, law or official document).
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