Most investors judge a fund by its average annual return. Yet between October 2007 and March 2009 the S&P 500 fell 56.8% from peak to trough. Long-term US Treasuries, the asset many people treat as the safe half of a portfolio, fell as much as 48.35% after their 2020 high and still had not recovered in September 2026. The average return told you none of that in advance.
In this guide you will learn what maximum drawdown is, how to calculate it from any price series, why recovery math makes deep losses so punishing, and how to set a personal drawdown limit that keeps you invested when markets break. Every market figure below comes from live drawdown data captured on 24 September 2026.
An underwater chart for SPY over five years. The line shows how far the fund sat below its previous high on each day.
What Is Maximum Drawdown?
A drawdown is the percentage decline from an investment's highest value, its peak or high-water mark, to a later low point. Maximum drawdown, often shortened to MDD, is the largest of those peak-to-trough declines over a chosen period. It answers one blunt question: if you had bought at the worst possible moment, how much would you have lost on paper before things turned around?
The maximum drawdown formula is simple: MDD = (Trough Value minus Peak Value) / Peak Value x 100. The result is always zero or negative. A reading of -30% means the investment lost 30% of its peak value before it went on to set a new high.
Two related measures matter just as much. Drawdown duration is the time from peak to trough. Recovery time is the time from trough back above the old peak. Together they describe both how deep the hole was and how long you sat in it.
Take SPY, the largest S&P 500 ETF. On 23 September 2026 it traded at $767.81, just 1.3% below its all-time high of $777.88. That 1.3% is its current drawdown. Its maximum drawdown across its tracked history is 55.2%, beginning in October 2007, and its longest drawdown lasted 2,404 days, from March 2000 to October 2006.
2,404 days: the longest SPY drawdown on record, from March 2000 to October 2006.
Notice the difference between those two numbers. Current drawdown tells you where you stand today. Maximum drawdown tells you the worst case the asset has already shown it is capable of delivering, and it is the number you should plan around.
Why Maximum Drawdown Matters More Than Volatility
Standard deviation, the usual measure of volatility, treats a sharp gain and a sharp loss as equally risky. You do not. A sudden 30% jump feels pleasant, while a 30% fall is the moment most investors are tempted to sell. Maximum drawdown measures exactly the moment you are most likely to make a mistake, which is why many professional allocators read it before they read anything else.
The second reason is recovery math. Losses and gains are not symmetrical. The gain you need to get back to even is Peak / Trough minus 1, and it grows much faster than the loss itself.
Recovery math: the gain needed to break even
Read that table twice. A 50% loss needs a 100% gain just to break even. That is why a strategy that avoids the deepest hole can beat one with a higher average return over a full market cycle, even if it looks boring in good years.
+131.5%: the gain the S&P 500 needed after March 2009 just to get back to its October 2007 peak.
The third reason is time. According to DrawdownAlerts' S&P 500 drawdown history, the index took about 4 years after its March 2009 low to close at a new high, and about 4.6 years after its October 2002 low. If you need the money within five years, a drawdown of that length is not a paper loss. It is a real one.
Finally, maximum drawdown is the risk number that best matches real behaviour. If you know you would sell after a 30% fall, any portfolio whose history includes a 50% drawdown is too aggressive for you, however attractive its Sharpe ratio looks on paper.
Every major S&P 500 drawdown since 1985. Depth and recovery time vary far more than most investors expect.
How to Calculate Maximum Drawdown and Set Your Own Limit
You can calculate maximum drawdown in a spreadsheet in a few minutes, then use the result to size your portfolio. Here is the full process, from raw prices to a personal risk limit.
Step 1: Get a Clean Price Series
Download daily or monthly closing prices for the fund or for your whole portfolio. Use total return data, meaning prices with dividends reinvested, whenever you can, because price-only data overstates drawdowns for income-heavy assets. Longer is better: a history that skips 2000 to 2002 and 2007 to 2009 will make most stock funds look far safer than they really are.
Step 2: Track the Running Peak
In a new column, record the highest value reached so far. If prices sit in column B starting at B2, enter =MAX($B$2:B2) in C2 and drag it down. This running peak is the high-water mark, and it only ever moves up.
Step 3: Calculate the Drawdown for Every Row
In column D, enter =B2/C2-1 and drag it down. Every value will be zero (a new high) or negative (underwater). Plot this column and you get an underwater chart, exactly like the SPY chart at the top of this article.
Step 4: Take the Minimum
Maximum drawdown is simply =MIN(D:D). Check your sheet against a real case. SPY started its 2020 drawdown at $310.96 and bottomed at $206.11. (206.11 minus 310.96) / 310.96 = -33.7%, which matches the published figure for that event.
Step 5: Measure Duration and Recovery
Note the date of the peak, the date of the trough and the first date the price closes back above the old peak. SPY's 2022 drawdown began in January 2022 at $453.21, fell to $342.19 and did not recover until December 2023, a total of 709 days underwater.
Step 6: Set Your Drawdown Budget
Decide the largest loss, in money, that you could sit through without selling. Say you have $100,000 and you know from experience that a $25,000 paper loss is your limit. Your drawdown budget is 25%. If you are unsure, a structured investment risk profile is a good place to start.
Now divide that budget by the historical maximum drawdown of your riskiest holding. A broad stock index has fallen as much as 55% to 57% in the past, so 25% divided by 56% suggests holding roughly 45% in stocks, with the rest in assets that historically fell far less, such as cash or short-term government bonds. Treat this as a starting point, not a precise answer, because the next crash can be deeper than the last one.
Step 7: Compare Strategies With the Calmar Ratio
When two strategies have similar returns, compare them on return per unit of drawdown. The Calmar ratio divides annualised return by the absolute value of maximum drawdown, usually over three years. A strategy earning 10% a year with a 20% maximum drawdown scores 0.5. One earning 8% with a 10% drawdown scores 0.8 and is the better risk-adjusted choice. If you backtest a trading strategy with AI, ask for maximum drawdown, recovery time and Calmar in every report.
Real Examples: Maximum Drawdown Across Stocks, Bonds and Bitcoin
Maximum drawdown becomes most useful when you compare asset classes side by side. The table below uses completed drawdowns from DrawdownAlerts data, plus the live status of each asset on 23 September 2026.
Worst drawdowns by asset class
Three lessons stand out. First, speed and depth are different things: the COVID crash was deeper than the 2022 bear market but recovered in about 5 months, versus about 14 months for 2022. Second, so-called safe assets can suffer equity-sized drawdowns. Long-dated Treasuries fell almost as far as stocks did in 2008, because the Federal Reserve raised rates at the fastest pace in roughly 40 years.
Third, Bitcoin's drawdowns sit in a different league. It has fallen 50% or more from a prior high at least six times since 2011, and on 23 September 2026 it was 32.4% below its October 2025 high near $126,000, 352 days after that peak.
-45.3%: how far the TLT long-Treasury ETF still sat below its 2020 high on 23 September 2026, after 2,218 days underwater.
Common Mistakes When Using Maximum Drawdown
Mistake 1: Using a Short Look-Back Window
A fund launched in 2012 has never lived through a 50% stock crash. Its maximum drawdown may read -25%, and that number says more about the calendar than about the strategy. Whenever you can, check a proxy index that covers both 2000 to 2002 and 2007 to 2009.
Mistake 2: Assuming Bonds Cannot Have Deep Drawdowns
The TLT page below is the clearest warning of the 2020s. A 20+ year Treasury ETF traded at $80.46 on 23 September 2026, against an all-time high of $147.03. Holding long-duration bonds is a bet on interest rates, and the drawdown data proves it. Short-term bonds and cash behave very differently from long bonds.
TLT, a long-term Treasury ETF, still 45.3% below its high on 23 September 2026, more than six years after the peak.
Mistake 3: Ignoring Recovery Time
Two funds with a similar maximum drawdown can feel completely different to own. TLT's 2016 drawdown of 17.9% fell for about 156 days but took about 2.5 years to recover. Always read depth alongside the time spent underwater.
Mistake 4: Treating Past Maximum Drawdown as a Ceiling
The worst drawdown on record is a planning floor, not a ceiling. Anyone who sized a portfolio around the dot-com crash's 49.1% fall in 2002 was hit by a 56.8% fall just five years later. Add a safety margin to any historical figure you use.
Mistake 5: Measuring Single Holdings Instead of the Portfolio
Your real drawdown depends on how your holdings move together. Two assets that fell 30% at different times can produce a much smaller portfolio drawdown, while two that crash together offer no cushion at all. Run the calculation on your combined portfolio value, then use diversification and regular rebalancing to keep it inside your budget.
Frequently Asked Questions
What is a good maximum drawdown?
There is no universal answer. For a diversified stock portfolio, drawdowns of 30% to 57% have happened four times since 1985, so anything shallower over a full cycle is strong. For a trading strategy, many professionals look for a Calmar ratio above 1, meaning annual return exceeds the maximum drawdown. What matters most is that it fits your own drawdown budget.
How do you calculate maximum drawdown in Excel?
Put prices in column B, the running peak =MAX($B$2:B2) in column C, and the drawdown =B2/C2-1 in column D. Maximum drawdown is =MIN(D:D). Format column D as a percentage and chart it to see the underwater curve.
How long does it take to recover from a drawdown?
It varies widely. Since 1985, S&P 500 recoveries measured from the trough ranged from about one month after shallow pullbacks to about 4.6 years after the dot-com crash. Measured from the prior peak, the 2000 and 2007 declines took roughly 5.5 to 7 years to fully recover.
Is maximum drawdown better than standard deviation?
They answer different questions. Standard deviation describes typical day-to-day swings. Maximum drawdown describes the single worst loss. Use both: volatility for everyday risk, and drawdown for the scenario that tests your nerve.
What to Watch Next
- v Does TLT reclaim its $147.03 high, or does its drawdown run past seven years in August 2027?
- v Does Bitcoin's 32.4% drawdown from its October 2025 peak deepen toward the 55% to 78% range seen in past cycles?
- v Does SPY stay within 5% of its $777.88 high through the fourth quarter of 2026?
- v Does your own portfolio's current drawdown stay inside the drawdown budget you set in Step 6?
Key Takeaways
- Maximum drawdown is the largest peak-to-trough fall an investment has suffered, and it is the number most closely tied to panic selling.
- Recovery is asymmetric: a 50% loss needs a 100% gain, and the S&P 500 needed +131.5% after March 2009.
- Depth and time both matter. The COVID crash recovered in about 5 months, the dot-com crash in about 4.6 years from its trough.
- Long-term bonds are not drawdown-proof: TLT was still 45.3% below its high in September 2026.
- Set a drawdown budget in money, then size your riskiest assets so a repeat of their worst fall stays inside it.
- Use the Calmar ratio alongside the Sharpe ratio when comparing funds or strategies.
Remember the river. Average returns tell you how deep the water usually is. Maximum drawdown tells you where the deepest spot is and whether you can keep your footing there. Plan for that spot, and the averages will take care of themselves.
This article is for education only and is not personal financial advice.