Investiční slovník
Drawdown: What Maximum Peak-to-Trough Decline Is and Why You Should Track It
Key takeaways
- Drawdown is the percentage fall in portfolio value from its historical peak to a temporary low.
- Maximum drawdown (MDD) is the largest recorded decline — it tells you the worst that could have happened to you.
- The deeper the drawdown, the higher the return needed to get back to zero: a 50% fall requires +100% to recover.
- Drawdown helps you assess whether your portfolio matches your psychological resilience to losses.
- The historical drawdown of the S&P 500 exceeded 50% in the 2008–2009 crisis — that is a real risk, not theory.
Drawdown is the percentage fall in the value of an investment or portfolio from its all-time high to a temporary low — and it is one of the most practical risk metrics you have at your disposal as an investor.
How drawdown is calculated
The calculation is simple: (trough value − peak value) / peak value × 100. If a portfolio reached a peak of CZK 100,000 and fell to CZK 70,000, the drawdown is −30%. The term maximum drawdown (MDD) refers to the largest recorded decline in the entire history of the investment.
Why drawdown is treacherous: the asymmetry of recovery
Drawdown is treacherous because of mathematical asymmetry: losses and gains are not symmetric. If a portfolio falls 20%, you need +25% to get back to zero. If it falls 50%, you need +100%. The deeper the decline, the harder the recovery — and the more years of returns the decline "consumes."
- 10% decline → need +11.1% to break even.
- 25% decline → need +33.3% to break even.
- 50% decline → need +100% to break even.
- 80% decline → need +400% to break even.
How to use drawdown when building a portfolio
Before investing, ask yourself: "How would I react if my portfolio fell 30%? 50%?" If your answer is that you would sell, your risk is too high for your profile. Drawdown helps you set allocation so that the maximum decline stays within a range that is psychologically and financially manageable for you — not just on paper.
Drawdown vs. volatility
Volatility (standard deviation) measures average fluctuation. Drawdown measures the actual experience: how far down you were from the peak. For practical planning drawdown is often more understandable — it tells you concretely what the worst thing that happened was, not an abstract statistic of movements.
FAQ
What is drawdown in simple terms?
Drawdown is the fall in the value of an investment from its peak to a temporary low, expressed as a percentage. It tells you how many percent you were "underwater" at the worst moment compared to your peak.
What is maximum drawdown?
Maximum drawdown (MDD) is the largest historical decline of an investment or fund from peak to trough. It is the most important indicator for assessing the worst-case scenario an investor could have experienced.
Why does a 50% drawdown require +100% to recover?
Because percentages are not symmetric. If you have 100 and lose 50%, you are left with 50. For 50 to return to 100, it must grow by 100%, not 50%. The deeper the decline, the harder the mathematics of recovery.
How can I use drawdown when selecting ETFs?
Look at the historical maximum drawdown of the fund. If it exceeded, say, −40% and you know you would panic at such a decline, the fund is too volatile for your profile. Look for an allocation where even the maximum drawdown stays within a psychologically manageable range.