Max Drawdown (Max DD)

Max Drawdown is the maximum peak-to-trough decline in the value of an investment portfolio, before a new peak is attained. It is the ultimate indicator of absolute downside risk.

While volatility measures the general frequency and size of daily price fluctuations, Max Drawdown tells you the worst-case scenario. It answers the critical psychological question: "If I invested at the exact peak of the market, how much money would I have lost at the absolute bottom?"

For example, if a portfolio starts at $10,000, grows to $15,000 (peak), declines to $9,000 (trough), and then recovers back to $16,000 (new peak), the drawdown is calculated as:

Drawdown = ($9,000 - $15,000) / $15,000 = -40%

This is a vital metric because recovering from drawdowns requires exponentially higher returns. A 10% loss requires an 11% gain to break even, but a 50% drawdown requires a 100% gain to recover.

On StrategyIndex.io, minimizing Max Drawdown is a central goal of tactical strategies. For example, while the Classic 60/40 Portfolio has a historical max drawdown of -20.5%, Browne's Permanent Portfolio exhibits a drawdown of only -8.2%, thanks to its defensive allocation to gold and short-term bills.