For example, if a portfolio's value peaked at 1.5 million and later fell to 1.2 million, the drawdown would be 20%. The largest such decline over a given track record is called the "maximum drawdown," and it is often used as a reference point for how well a strategy has held up during down periods in the past.
How it is calculated
Drawdown is calculated across the entire history of an asset's ups and downs, with the reference peak updating every time a new high is reached. When evaluating a track record, it provides a way to look beyond simple total return and see how much the value dipped along the way.
Points to keep in mind
A small maximum drawdown in the past does not guarantee that future declines will stay within that range. It should be treated as reference information based on historical data.