Max DD

Maximum Drawdown Explained

Q: Is Maximum Drawdown the same as my biggest loss?

Not exactly. MDD measures the largest continuous decline from a peak — it accounts for the full sequence of losses, not a single day. If your portfolio fell 10%, recovered 5%, then fell another 15%, the MDD is not 15% — it depends on whether the second fall brought the total below the first trough.

Q: How does MDD relate to risk-adjusted return?

MDD feeds into the Calmar Ratio — annual return divided by Maximum Drawdown — which is a popular risk-adjusted metric for trend-following and momentum strategies. A portfolio with high returns but a catastrophic drawdown is far less appealing than one with slightly lower returns and a controlled drawdown.

Q: Should I be worried about a large MDD if I'm a long-term investor?

It depends on your time horizon and psychology. Long-term investors can mathematically recover from large drawdowns, but the real risk is behavioural — selling at the trough. If your MDD is causing you to consider exiting positions, that's a signal your portfolio's risk level may be above your true tolerance.

The largest peak-to-trough decline in your portfolio's history

Formula

(Trough Value − Peak Value) / Peak Value

measured as the largest percentage decline from any historical peak to the subsequent lowest point before a new peak is reached.

What is the Maximum Drawdown?

Maximum Drawdown (MDD) measures the worst peak-to-trough loss your portfolio has experienced over its full history. Unlike VaR, which is a statistical estimate, MDD is a historical fact — it actually happened. It captures the psychological and financial reality of holding through a downturn: if your portfolio fell 35% from peak to trough, you had to stomach that loss (on paper) while staying invested.

How to interpret it

Maximum Drawdown is always negative (or zero). A smaller absolute value is better. The key question isn't just the magnitude but also the recovery time — how long did it take to return to the previous peak? A −15% drawdown recovered in 3 months is very different from one that took 3 years. MDD is most meaningful in comparison to a benchmark: if your portfolio drew down −20% while the market fell −30%, that's outperformance even though the number looks bad.

What counts as a good Max DD?

0% to −10%Excellent — very defensive or short history; limited downside captured

−10% to −20%Good — typical of diversified portfolios through moderate corrections

−20% to −35%Elevated — significant drawdown; review concentration and timing

< −35%High — severe drawdown; assess whether recovery is realistic

What affects your Max DD?

Concentration — single holdings can catastrophically drag a portfolio
Market timing — entering at a peak amplifies drawdown on paper
Asset correlation — highly correlated holdings fall together in market stress
Rebalancing — systematic rebalancing can cut the depth of drawdown events
History length — longer holding periods capture more market cycles and tend to show larger MDD

How Portivex uses Max DD

Portivex calculates MDD across your full portfolio return history, using daily NAV. The drawdown chart on the performance page shows you the drawdown curve over time — not just the worst point, but every recovery and decline. This helps you see whether drawdowns were isolated events or part of a pattern. Your investor profile determines the threshold at which Portivex flags your MDD as elevated.

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Frequently asked questions

Is Maximum Drawdown the same as my biggest loss?

Not exactly. MDD measures the largest continuous decline from a peak — it accounts for the full sequence of losses, not a single day. If your portfolio fell 10%, recovered 5%, then fell another 15%, the MDD is not 15% — it depends on whether the second fall brought the total below the first trough.

How does MDD relate to risk-adjusted return?

MDD feeds into the Calmar Ratio — annual return divided by Maximum Drawdown — which is a popular risk-adjusted metric for trend-following and momentum strategies. A portfolio with high returns but a catastrophic drawdown is far less appealing than one with slightly lower returns and a controlled drawdown.

Should I be worried about a large MDD if I'm a long-term investor?

It depends on your time horizon and psychology. Long-term investors can mathematically recover from large drawdowns, but the real risk is behavioural — selling at the trough. If your MDD is causing you to consider exiting positions, that's a signal your portfolio's risk level may be above your true tolerance.

Related metrics

See your Maximum Drawdown in real time.

Add your holdings and Portivex calculates your Max DD — with confidence context and plain-English interpretation tailored to your investor profile.

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