Maximum Drawdown

Explanation

Maximum drawdown (MDD) captures the worst-case scenario for an investor who entered at the peak and exited at the trough. It is expressed as a percentage: a drawdown of −30% means the portfolio lost 30% from its highest point before recovering.

Drawdown matters more to most investors than standard deviation because it represents a lived experience. A portfolio with 15% annualized volatility might sound abstract; a −35% drawdown from $100,000 to $65,000 is visceral.

The S&P 500 has experienced maximum drawdowns of −50.9% (2007–2009), −33.9% (Feb–Mar 2020), −49.1% (2000–2002), and −56.8% (1973–1974). Recovery times ranged from 5 months (2020) to over 7 years (2000–2007).

Formula

Example

A portfolio grew from $100,000 to $145,000 (its peak), then fell to $98,600 before recovering.

The maximum drawdown was 32%. An investor who bought at the $145,000 peak and panic-sold at the $98,600 trough would have locked in a 32% loss. An investor who held through the drawdown eventually recovered.

How Stoquity Uses This

Stoquity tracks rolling maximum drawdown for every portfolio and displays it on the Analytics tab. The Drawdown Governor is specifically designed to limit drawdown severity—when a portfolio approaches its charter-defined maximum drawdown threshold, the governor automatically reduces position sizes and increases cash allocation.

Common Mistakes

• Maximum drawdown is always measured from peak to trough, not from initial investment to trough
• A portfolio can have a small maximum drawdown but still deliver poor returns
• Recovery time after a drawdown is as important as the drawdown depth itself