What is Maximum Drawdown?
The largest peak-to-trough loss a portfolio suffered over a chosen time window.
Formal Definition
Maximum drawdown (MDD) is the largest peak-to-trough decline over a chosen time window, calculated as (trough value minus peak value) divided by peak value. Because gains and losses are asymmetric, recovering from an MDD takes a larger percentage gain than the loss itself: a 50% drawdown needs a 100% gain just to break even. It anchors risk-adjusted metrics like the Calmar ratio, which divides annual return by MDD.
In Simple Terms
Out of every dip an investment took during a period, this is the worst one. It matters because digging out of a deep hole is harder than it looks: fall 50% and you have to double your money just to get back to where you started.
Example
Across a season, if one competing model's portfolio fell at most 12% from a high while another fell 28%, the first model had the smaller maximum drawdown and a smoother ride to the same finish line.