Maximum Drawdown Calculator
Calculate the Maximum Drawdown (MDD) to measure the largest peak-to-trough decline in your investment portfolio. MDD helps assess downside risk and portfolio volatility.
Maximum Drawdown Results
Risk Analysis
Historical Benchmarks
S&P 500 (1928-2023): 83.4% max drawdown
Bonds (1928-2023): 29.6% max drawdown
Gold (1971-2023): 61.8% max drawdown
Note: Lower MDD indicates lower risk
Understanding Maximum Drawdown
Maximum Drawdown (MDD) measures the largest peak-to-trough decline in the value of an investment portfolio over a specified time period. It represents the maximum loss an investor would have experienced if they bought at the peak and sold at the trough.
Maximum Drawdown Formula
MDD is calculated as:
MDD = (Peak Value - Trough Value) ÷ Peak Value
Expressed as a percentage: MDD × 100
Interpreting MDD
| MDD Range | Risk Level | Investor Suitability |
|---|---|---|
| MDD < 10% | Very Low | Conservative investors |
| 10% = MDD < 20% | Low | Moderate risk tolerance |
| 20% = MDD < 30% | Moderate | Balanced portfolios |
| 30% = MDD < 50% | High | Aggressive investors |
| MDD = 50% | Very High | Speculative investments |
Applications
- Risk Assessment: Measure downside risk of investments
- Portfolio Comparison: Compare risk across different strategies
- Stress Testing: Evaluate performance in worst-case scenarios
- Investor Psychology: Understand emotional impact of losses
- Performance Evaluation: Assess fund manager risk management
MDD vs. Other Risk Measures
- Standard Deviation: Measures volatility around the mean
- Value at Risk (VaR): Estimates potential loss over a time period
- Sharpe Ratio: Risk-adjusted return measure
- Maximum Drawdown: Worst-case peak-to-trough decline
Recovery Time
Recovery time measures how long it takes for an investment to return to its previous peak value after a drawdown. Longer recovery times indicate higher risk.
- Short Recovery: Less than 6 months - Low risk
- Medium Recovery: 6-24 months - Moderate risk
- Long Recovery: 2-5 years - High risk
- Extended Recovery: More than 5 years - Very high risk
Limitations
- Historical Focus: Based on past performance, not predictive
- Time Period Bias: Results depend on chosen time frame
- Magnitude Only: Doesn't consider frequency or duration
- Path Dependent: Order of returns affects calculation
- Market Conditions: Extreme events may not recur
Improving MDD
- Diversification: Spread investments across assets
- Asset Allocation: Include less volatile assets
- Risk Management: Use stop-loss orders and hedging
- Rebalancing: Maintain target allocations
- Long-term Focus: Avoid market timing
Tip: Maximum Drawdown helps investors understand the worst-case scenario for their investments. While past drawdowns don't predict future performance, they provide valuable insight into an investment's risk profile. Consider MDD alongside other risk measures for a comprehensive risk assessment.