Maximum Drawdown Calculator
Measure investment risk by calculating the maximum peak-to-trough decline
Calculate Maximum Drawdown
Highest value reached before the decline
Lowest value reached after the peak
Recovery Time Analysis
Compound Annual Growth Rate expected for recovery
Maximum Drawdown Results
Formula: MD = (Lowest Value - Peak Value) / Peak Value × 100%
Drawdown Risk Levels
Real-World Examples
SPY (S&P 500 ETF) - March 2020
Peak Value: $276.21
Lowest Value: $222.83
Maximum Drawdown: (222.83 - 276.21) / 276.21 × 100% = -19.33%
Risk Assessment: Moderate Risk - Typical market volatility
Bitcoin - December 2017 to December 2018
Peak Value: $19,252.96
Lowest Value: $3,178.62
Maximum Drawdown: (3,178.62 - 19,252.96) / 19,252.96 × 100% = -83.49%
Risk Assessment: Very High Risk - Extreme volatility
Recovery Needed: 523% gain to break even
Key Concepts
Peak Value
Highest price reached before decline
Starting point for drawdown measurement
Trough Value
Lowest price after the peak
Bottom of the decline
Drawdown %
Percentage decline from peak to trough
Risk measurement metric
Recovery Requirements
Key Insights
Larger losses require disproportionately larger gains to recover
Recovery time depends on both drawdown size and growth rate
Maximum drawdown is a key risk metric for portfolio analysis
Compare drawdowns across assets to assess relative risk
Past drawdowns may predict future risk patterns
Understanding Maximum Drawdown
What is Maximum Drawdown?
Maximum drawdown is a financial indicator that measures the largest peak-to-trough decline in the value of an investment, portfolio, or trading account. It represents the maximum loss an investor would have experienced if they bought at the highest point and sold at the lowest point during a specific period.
Why is it Important?
- •Measures downside risk and volatility
- •Helps assess investment risk tolerance
- •Guides portfolio allocation decisions
- •Compares relative risk across investments
Formula Breakdown
MD = (LP - PV) / PV × 100%
- MD: Maximum Drawdown (percentage)
- PV: Peak Value (highest point)
- LP: Lowest Value after peak
- Result: Negative percentage showing decline
Note: Maximum drawdown is always expressed as a negative percentage. A -20% drawdown means the investment lost 20% of its value from peak to trough.
Recovery Analysis
| Drawdown | Recovery Needed | Time at 10% CAGR | Risk Level |
|---|---|---|---|
| -10% | +11.1% | 1.1 years | Low |
| -20% | +25.0% | 2.3 years | Moderate |
| -30% | +42.9% | 3.6 years | High |
| -50% | +100.0% | 7.3 years | Very High |
Using Maximum Drawdown for Investment Decisions
Portfolio Optimization
- • Diversify to reduce maximum drawdown
- • Balance high-return, high-drawdown assets
- • Use defensive assets during volatile periods
- • Implement stop-loss strategies
- • Regular rebalancing to manage risk
Risk Management
- • Set maximum acceptable drawdown limits
- • Monitor real-time drawdown levels
- • Prepare for recovery time requirements
- • Consider emotional impact of losses
- • Plan exit strategies for extreme scenarios
Limitations and Considerations
- ⚠️Historical Focus: Based on past performance, may not predict future drawdowns
- ⚠️Time Sensitivity: Drawdown magnitude depends on the time period analyzed
- ⚠️Recovery Assumption: Recovery time calculations assume consistent growth rates
- ⚠️Psychological Impact: Real investors may not hold through maximum drawdowns