From peak to trough
Maximum drawdown looks for the highest value a portfolio reached, then the lowest value it fell to afterwards before passing that peak again, or up to the end of the period if it never got back. The gap between them, as a share of the peak, is the drawdown. With several falls, the maximum drawdown is the largest.
Why this number matters
The return tells you where the portfolio ended up; the maximum drawdown tells you how rough the road was. Many people sell at the worst point because they did not expect a fall that deep. Knowing the number lets you ask yourself honestly: would I have sat through that without selling at the bottom?
Remember the arithmetic from the start of this path: a 30% fall needs a gain of about 43% to return to the peak. How long the portfolio stayed below its peak matters as much as how deep it fell.
See drawdowns on funds
Each fund page on FoudaLens shows maximum drawdown next to returns. Compare two funds with similar returns.
Check yourself
1. A portfolio reached 200,000 and then fell to 150,000. What is the drawdown?
2. A fund had a small maximum drawdown last year. What does that mean?
Summary
- Maximum drawdown is the largest fall from a peak to a trough, as a share of the peak.
- The return says where the portfolio ended up; the drawdown says how hard the road was.
- The number comes from the past, and the next fall can be deeper.