Drawdown
The peak-to-trough percentage decline in the value of an investment or portfolio over a specific period.
What is Drawdown?
A drawdown is the peak-to-trough percentage decline in the value of an investment or portfolio over a specific period, measuring how much an investment has fallen from its highest point before recovering. Drawdowns can be measured on any time scale and are used to assess downside risk in portfolio management and backtesting of trading strategies. The maximum drawdown (MDD) captures the largest single peak-to-trough decline over an entire history and is a key risk metric alongside volatility and the Sharpe ratio. Smaller drawdowns are generally preferred, especially for investors approaching or in retirement who face sequence-of-returns risk.
Example
During the Global Financial Crisis, the S&P 500 declined approximately 57% from its October 2007 peak to its March 2009 trough—a drawdown that took more than four years to fully recover. An investor who retired in 2007 and sold equities at the trough would have permanently locked in those losses.