Investor Corner/Building and judging a portfolio/Performance Measurement
3.2.4 Maximum Drawdown
Maximum drawdown is the largest peak-to-trough fall an investment has experienced. It measures the worst pain an investor would actually have felt while holding through the toughest stretch in that fund's history.
What the figure captures
If a fund's value rose to a peak and then fell 35% before eventually recovering and rising again, its maximum drawdown for that period is 35%, regardless of how long the recovery ultimately took or how strong the fund's overall long-run return looked once that recovery was complete. It captures depth of pain, not overall long-run outcome.
Why it matters alongside average return
Two funds can show an identical average annual return over ten years while having experienced very different maximum drawdowns along the way. The fund with the smaller drawdown was almost certainly a psychologically easier one to hold through, which matters enormously in practice, since an investor who panics and sells during a large drawdown never actually gets to enjoy the eventual recovery.
Using drawdown when choosing a fund
A fund's historical maximum drawdown is a genuinely useful, honest way to ask yourself in advance: could I have actually held through a fall this severe without panicking and selling? If the honest answer is no, that fund's typical volatility may simply be a poor match for your own temperament, regardless of its long-run average return.
How PriLytics helps. PriLytics shows your portfolio's value over time in full, so past drawdowns, and how your own money actually behaved through them, are always visible in your own history. See performance over time.