Max drawdown is the biggest drop an investment took from a peak to a low.
Put simply, it's the worst loss you'd have sat through if you bought at the top. Not the average day. Not the typical year. The worst stretch.
That number deserves more attention than it gets. A 50% loss needs a 100% gain just to break even. Plenty of investors learn that math the hard way.
What is max drawdown in investing?
A drawdown is any fall from a previous high. Max drawdown, often shortened to MDD, is the biggest one in a given period.
It's shown as a percentage. That makes it easy to compare a $20 stock with a $2,000 stock. It works for funds and indexes too.
Picture a $10,000 investment. It climbs to $12,000. Then it slides to $7,200 before bouncing back.
The max drawdown is 40%. It's measured from the $12,000 peak, not from your $10,000 starting point.
That detail trips people up. Compared with what you put in, you're down $2,800. Measured from the top, $4,800 is gone.
How to calculate max drawdown step by step
The formula is short. You need two numbers: a peak and the lowest point that follows it.
Run it on any price history in four steps:
- Find a peak: a high point right before a decline starts.
- Find the trough: the lowest value before the price climbs back above that peak.
- Subtract the peak from the trough, then divide by the peak.
- Multiply by 100 to get the percentage.
One catch. A period can contain several peaks and drops. Run the math on each one and keep the biggest.
Try it on the S&P 500. The index closed at 1,565.15 on October 9, 2007. It bottomed at 676.53 on March 9, 2009.
Subtract, divide by 1,565.15, and you get roughly minus 0.568. Times 100, that's a max drawdown of about 57%.
The history books agree. The S&P 500 lost around 57% of its value during the Great Recession.
Why max drawdown is harder to recover from than it looks
Losses and gains are not mirror images. That asymmetry is the part people skip.
When you lose money, your base shrinks. Every percentage gain after that works on a smaller number.
The gain you need to break even grows fast as the drawdown gets deeper:
- A 10% loss needs an 11% gain to break even.
- A 20% loss needs a 25% gain.
- A 30% loss needs a 43% gain.
- A 50% loss needs a 100% gain.
- An 80% loss needs a 400% gain.
Read that last line again. An 80% drawdown isn't a setback. For a single position, it's close to permadeath.
Time makes it worse. The S&P 500 bottomed in March 2009. It only topped its 2007 record close in March 2013.
That's about five and a half years from peak to full recovery, counting price alone. With reinvested dividends, the wait was closer to five years.
Either way, anyone who bought the top spent years just getting back to even.
What is a good max drawdown percentage?
There's no single good number. An index, a single stock and a trading strategy live in different worlds.
Fund managers and trading strategies get judged on it too. A strategy averaging 15% a year looks great on paper. Sitting through a 60% drawdown to earn it is the hard bit.
A rough scale helps put any max drawdown in context:
Context still changes the verdict. A 30% drop in a broad index is rare and painful. In a single small-cap stock, it can happen in months.
Max drawdown for the S&P 500 and other indexes
Broad indexes spread the damage across hundreds of companies. That's diversification doing its job.
Even so, the S&P 500 has posted brutal drawdowns beyond the 2008 crisis. It fell about 34% in the 2020 Covid crash and about 25% in 2022.
A correction is a drop of 10% to 20% from a recent high. Past 20%, it's a bear market.
So what does a 5% drawdown mean? It's a routine pullback. Since 1990, the index has dipped at least 5% in roughly nine out of ten years.
Leverage can turn a routine dip into a much deeper drawdown. We broke down how in why this selloff feels different.
Max drawdown for single stocks like Meta and Netflix
Single stocks play a different game. One earnings report can do serious damage on its own.
Meta Platforms (META) closed at $382.18 on September 7, 2021. It hit $88.91 on November 3, 2022. That's a max drawdown of about 77%.
The worst day of that slide came on February 3, 2022. Meta lost 26% after its quarterly earnings report.
Netflix (NFLX) fell about 76% from its November 2021 high to its May 2022 low. Nvidia (NVDA) dropped about 66% between November 2021 and October 2022.
These weren't penny stocks. They were three of the best-known names in tech.
Meta didn't beat its old high until January 2024. That's about 28 months of waiting for anyone who bought the top.
Max drawdown vs volatility
Volatility measures how much a price moves. Max drawdown measures how much it has hurt.
Volatility is usually calculated as standard deviation. That's a measure of how far returns swing around their average.
The problem: volatility treats a 10% jump the same as a 10% drop. Your account does not.
Two investments can show the same volatility and very different drawdowns. One chops sideways in a tight range. The other grinds lower for two years.
The quick comparison:
- Volatility counts every move, up or down.
- Max drawdown only counts the worst drop.
- Volatility describes how big the typical swings are.
- Max drawdown describes the single worst stretch.
That's why max drawdown is the more honest risk number. It answers a sharper question: how bad has this already gotten?
Volatility still messes with your head, even when it costs you nothing. The Stoxcraft Academy explains why volatility feels so bad.
How to use max drawdown in your own portfolio
Knowing the number is step one. Using it before the next crash is the part that pays.
Stress-testing your portfolio against a 2008-style drop
Start with history. Ask what your current mix would have lost in a real crash.
A stress test runs your portfolio through a past crisis, like 2008, 2020 or 2022. The result is a max drawdown in percent and in dollars.
Seeing, say, $10,000 shrink to $5,700 hits differently than reading "minus 43%." That gut check is the whole point.
Try it below. Pick a crash, set your mix and see the damage from peak to trough.
For the full method, the Academy lesson on how to stress-test your portfolio walks through each step.
Sizing positions around your max drawdown limit
Next, set your own limit. Decide the biggest portfolio loss you could sit through without selling.
That limit should match your risk tolerance, not your confidence on a good day.
Then give each stock its own loss budget inside that limit:
A calmer stock with 30% drawdowns could fill twice that space under the same rule. The wilder the history, the smaller the bet.
One warning: a past max drawdown isn't a worst case. The next one can be deeper, so leave yourself some slack.
What a stock's max drawdown tells you before you buy
Max drawdown won't predict the next crash. It tells you what owning a stock has already cost people.
Check it before you buy, not after the drop. If a stock has fallen 70% before, assume it can do it again.
Research individual stocks in the Stoxcraft Screener. Then check each one's price history over several years, not just last month's run.
Now ask the only question that counts: would you hold through that, or sell at the bottom?
If the honest answer is "I'd sell," the position is too big. Shrink it now, while it's still your choice.
