Drawdown measures how much an investment or portfolio declines from its most recent peak to its lowest point before recovering. It is commonly expressed as a percentage of the peak value (e.g., a 20% drawdown from $100,000 to $80,000) or as a dollar amount. Maximum drawdown (MDD) refers to the largest such decline over a specified period.
Investors and managers monitor drawdown to understand downside risk and to compare investment paths; it complements volatility by focusing on losses from peaks rather than average fluctuations. Drawdown can be computed for a single asset, a strategy, or a portfolio, and over different time windows (e.g., rolling 1 year, 5 years).
Shorter drawdowns imply less severe downside; longer, deeper drawdowns indicate higher risk and potentially longer recovery times. Time to recovery (TTR) and the depth of the drawdown together describe the resilience of an investment approach. Some use drawdown limits or risk controls to manage allocation.
If a portfolio peaks at $100,000 and later declines to $85,000, the drawdown is $15,000, or 15%.
Maximum drawdown (MDD) · Peak · Trough · Recovery time · Volatility · Downside risk