What This Means
Maximum drawdown is the largest percentage decline from your highest portfolio value to the lowest portfolio value within a given time period.
Formula:
Maximum drawdown = (trough value − peak value) / peak value
In practice, maximum drawdown is often displayed in two ways:
- As a negative percentage: −25% (shows a loss)
- As an absolute decline: 25% drawdown (just the magnitude)
Both represent the same thing—the maximum peak-to-trough decline your portfolio has experienced. The choice is stylistic, though negative percentages can feel more visceral.
SharpeShare's Largest decline is measured on time-weighted return, so a deposit or withdrawal neither creates nor hides a decline.
A Simple Example
Imagine you started the year with $100,000 in your portfolio:
- By March, market strength pushed it to $120,000 (peak)
- A sudden market correction in June dropped it to $85,000 (trough)
- By year-end, you recovered to $130,000
Your maximum drawdown is: ($85,000 − $120,000) / $120,000 = −29.2%
Notice: your final return is +30% for the year, but your maximum drawdown of −29% tells the real story of what you experienced during the worst moment. That's the risk you actually took on.
Why It Matters
Return is not risk
Two investors can have identical annual returns—say, +25%—but completely different drawdowns. One might have grown steadily while the other experienced wild swings. The same return can come from very different paths, and drawdown reveals which path you took.
It's the largest decline so far
Your annual return might be positive, but at some point during the year you faced a decline. Maximum drawdown is not theoretical; it's the actual worst moment you've already lived through. It answers the question: What's the most I've lost at once?
Risk and return together tell the whole story
A portfolio that returned +40% with a −50% drawdown fell much further along the way than one that returned +15% with a −5% drawdown. Comparing them requires looking at both metrics. Investors want to know not just what you gained, but how much risk you took to get it.
Common Mistakes
Focusing only on return
"I returned +50% this year" sounds impressive until someone asks about drawdown. A +50% return with a −60% drawdown means you lost more than half your portfolio at one point before recovering. That context changes the narrative entirely.
Confusing yearly return with maximum drawdown
Your annual return might be positive, but your maximum drawdown occurred mid-year and may have been severe. The positive return doesn't erase that worst moment. Both metrics are important and independent.
Assuming high drawdown means bad strategy
A high drawdown doesn't automatically mean poor investing. Growth stocks and aggressive strategies naturally experience larger drawdowns. The question is whether the returns justify the drawdown you took, and whether it fits your risk tolerance.
Ignoring drawdown recovery time
Two portfolios can have the same maximum drawdown but recover at different speeds. One might bounce back in months; another might take years. Both are worth considering.
In SharpeShare
SharpeShare connects to your brokerage account and calculates your maximum drawdown, shown as Largest decline, alongside your total and annualized returns, benchmark comparison against the S&P 500, and other risk metrics, without a spreadsheet or manual calculations. You see drawdown next to the return, not just the upside.
This matters because:
- Broker data: Numbers come from the broker's own holdings and transactions, not self-reported entries.
- Context: You see drawdown alongside returns and benchmark comparison, making it easy to understand your risk-adjusted performance.
- Sharing: If you choose to share an account, its picture and link show the return vs the S&P 500 since the first day SharpeShare can measure, as percentages only; drawdown and the other risk metrics stay in your own dashboard.
- Over time: Following drawdown helps you evaluate whether your strategy is delivering the risk-adjusted results you want.