What is Maximum Drawdown, and what does it tell me?
Maximum Drawdown (Max DD) is the largest peak-to-trough decline a strategy has experienced, measured from a peak (high-water mark) down to the lowest point that followed it. It is expressed as a negative percentage. A Max DD of -15% means the strategy fell 15% from its peak before recovering.
It answers a pointed question: what is the worst loss an investor in this strategy would have had to endure, and how bad did it get before things turned around?
How it is calculated
DMS computes Max DD on a month-end basis. Walking forward through the equity curve, it tracks the highest value reached so far and measures how far below that high-water mark each subsequent month falls. The deepest of those declines is the Max DD.
Because DMS strategies are evaluated monthly, the figure reflects month-end to month-end moves. Intra-month, a strategy will have dipped lower than any month-end close shows, so a daily-measured drawdown would be deeper. Every strategy and benchmark on the site is measured the same way, so comparisons between them remain fair even though all of them understate the intra-month extreme.
The global toggles feed into it. Turning on Inflation Adjusted Returns, Include Trading Friction, or Taxable Account changes the return stream the curve is built from, and the Max DD moves with it.
What it is useful for
Max DD is one of the most honest stress-tests available for a strategy. It tells you: this is the real-world pain that an investor would have experienced at the worst moment in the strategy's recorded history. Paired with the Max DD Recovery metric, which shows how long it took to get back to the prior peak, it gives a sense of both depth and duration of the worst episode.
For comparison, the S&P 500 has experienced drawdowns exceeding 50%, and a traditional 60/40 portfolio has seen drawdowns around 32%. DMS strategies are designed with low drawdowns as a central goal, not an afterthought.
What it does not tell you
This is the most important thing to understand about Max DD: it is a historical figure, not a guarantee of maximum future drawdowns.
The Max DD shown is the worst drawdown the strategy has experienced to date, based on the specific market environments in the backtest and live history. It is not a promise, a guarantee, or a prediction of the worst that could ever happen. As Meb Faber so aptly has said: your largest drawdown is still to come.
Max DD and the date range selector
The Max DD shown reflects the currently selected date range, not the full history. Narrow the range to the last five years and you will see the worst drawdown within those five years, which may be far smaller than the all-time figure if the worst episode fell outside the window. For the all-time number, use the maximum available range for the strategy.
There is a subtlety here worth knowing. The high-water mark resets at the start of your selected range. The calculation has no memory of anything before it, so the opening month is treated as the first peak.
If your range begins partway into a decline, the real peak that preceded it is invisible, and the drawdown gets measured from an already-depressed starting value. A range beginning at a market bottom will make almost any strategy look serene. When you want to understand risk rather than study a specific episode, start from the full range.
Pairing Max DD with other risk metrics
Max DD captures the single worst episode but says nothing about how often or how persistently a strategy draws down. Two strategies can share the same Max DD while feeling very different to hold - one might recover quickly, another might grind sideways for years. For a fuller picture of drawdown behavior, pair Max DD with:
- Ulcer Index - captures both the depth and duration of all drawdowns, not just the worst one
- Max DD Recovery - shows how long the worst drawdown took to fully heal. If the strategy had not regained its prior peak by the end of the selected range, this shows a dash rather than a number, since the episode has no recovery date yet.
- Sortino Ratio - measures return per unit of downside risk