Maximum drawdown
Maximum drawdown is the worst peak-to-trough fall your portfolio has actually had in the selected window. It measures the loss you lived through, not the one a model predicts.
On this page
Maximum drawdown is the largest fall from a high point to a subsequent low point that your portfolio actually went through, in the window you have selected.
Where volatility describes the average spread of outcomes, drawdown describes the single worst stretch. It is the number that corresponds to how an investment felt, because nobody experiences a standard deviation, but everybody remembers watching a balance fall by a third.
How it is calculated
Gylder walks your value series from the start of the window, keeping track of the highest value seen so far, and records the largest percentage fall below that running peak:
drawdown at each point = value / highest value so far − 1
maximum drawdown = the most negative of those
It is always zero or negative. A portfolio that only ever rose has a maximum drawdown of zero.
Two things follow from the definition. The peak has to come before the trough, so this is a fall you actually experienced rather than the gap between the best and worst days in any order. And recovery is not part of it: a portfolio that fell 30% and fully recovered still shows a 30% maximum drawdown, because it did happen.
How to read it
A larger figure means a deeper hole at some point in the window. Gylder does not tell you what an acceptable drawdown is. That depends on your horizon and on what you would have done partway down, which is a question about you rather than about the portfolio.
Two cautions when comparing.
It depends heavily on the window. A one year drawdown and a ten year one are not comparable, because the longer window has simply had more opportunity to contain a bad stretch. Changing the date range on the Performance chart recalculates this along with everything else.
It is a single event. One number tells you the worst episode happened, not how often bad episodes happen. A portfolio with one severe drawdown and one with five moderate ones can report similar figures while behaving nothing alike.
Where it is used
Maximum drawdown is the denominator of the Calmar ratio, which sets your annualised return against it. For a forward looking estimate of loss rather than a historical worst case, see value at risk.
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