What is MDD?
Maximum drawdown (MDD) is the largest percentage decline from a previous peak to a subsequent trough within the observation period. The peak must occur before the trough. You cannot pair the lowest value with a high that occurred later.
Drawdown at time t (%) = (current assets ÷ highest assets observed up to t − 1) × 100
MDD = the minimum drawdown in the observation period
Declines are negative here. Other sources may report a -20% MDD as a positive loss magnitude of 20%.
Cumulative return shows how much you gained from the start. MDD shows how far you fell from a peak while holding the investment. A profitable ending can hide a large loss along the way. Volatility measures fluctuations in both directions; MDD focuses on the deepest fall.
How do you calculate MDD?
Assume no deposits or withdrawals. KRW 100 million rises to KRW 150 million, then falls to KRW 75 million.
- The running peak is KRW 150 million.
- The decline is 150 − 75 = KRW 75 million.
- Drawdown = (75 ÷ 150 − 1) × 100 = -50.00%.
The loss from the starting principal is -25%, but MDD from the peak is -50%. From KRW 75 million, restoring the original KRW 100 million needs about 33.33%. Restoring the KRW 150 million peak needs 100%. Recovering principal and recovering a previous peak have different targets.
MDD differs from the worst single-day return. A path of 100 → 90 → 80 has daily returns of -10% and about -11.11%, but MDD is -20%.
Month-end prices can miss a sharp fall that reverses before the month ends. Daily closes can also miss intraday lows. The same investment can have different MDD values depending on the period and observation frequency.
Why does a 50% loss need a 100% gain?
Losing half of KRW 100 million leaves KRW 50 million. You need another KRW 50 million to restore principal. That is 100% of the remaining capital. The loss uses the original value as its denominator. The recovery gain uses the smaller remaining value.
Required recovery gain (%) = loss magnitude L ÷ (100 − L) × 100
Use percentage units for L, such as 50. The formula applies for 0 ≤ L < 100.
| Loss | Capital remaining | Required gain |
|---|---|---|
| -10.00% | 90.00% | 11.11% |
| -20.00% | 80.00% | 25.00% |
| -30.00% | 70.00% | 42.86% |
| -50.00% | 50.00% | 100.00% |
| -70.00% | 30.00% | 233.33% |
| -90.00% | 10.00% | 900.00% |
A -90% loss leaves one-tenth of your original money. You need to multiply what remains by ten, which requires a 900% gain. Deeper losses leave a smaller base from which to recover.
Change the loss and see the required gain
Required gain on the remaining capital: 100.00%
Try other loss percentages in the loss recovery calculator.
Can equal final returns have different MDD?
In this hypothetical example, A and B both start with KRW 100 million and end with KRW 121 million two years later. At the first year-end, A has fallen to KRW 80 million and B to KRW 40 million.
Both have a 21% cumulative return and 10% CAGR. But B’s investor had to hold through a KRW 60 million loss. Selling at that point would have meant missing the recovery. The gains needed at the trough to restore principal are 25% for A and 150% for B.
Hypothetical two-year investment with no deposits or withdrawals. Only the start and each year-end are shown.
| Measure | A | B |
|---|---|---|
| Cumulative return | 21.00% | 21.00% |
| CAGR | 10.00% | 10.00% |
| MDD | -20.00% | -60.00% |
| Gain needed at trough | 25.00% | 150.00% |
View chart values
| Time | A | B |
|---|---|---|
| Start | 100 | 100 |
| Year 1 | 80 | 40 |
| Year 2 | 121 | 121 |
| Time | A | B |
|---|---|---|
| Start | 0.00% | 0.00% |
| Year 1 | -20.00% | -60.00% |
| Year 2 | 0.00% | 0.00% |
Losses between the observations may have been deeper than the chart shows. Explore an actual holding’s path in the investment backtest.
Does a larger MDD mean a longer recovery?
A deeper loss requires a larger gain, but recovery time depends on what the market does next. After the pandemic decline, the S&P 500 regained its previous peak in about five months from the trough. After the financial crisis, it took about four years. Knowing the gain needed to recover does not tell you when it will arrive.
Check where the recovery clock starts. Trough-to-recovery measures the rebound. Peak-to-recovery also includes the time spent falling. If the previous peak has not been reached by the last observation, the investment remains unrecovered.
| Peak → trough | Decline | Trough to prior peak |
|---|---|---|
| 2007-10-09 → 2009-03-09 | -56.8% | About 49 months |
| 2020-02-19 → 2020-03-23 | -33.9% | About 5 months |
The table uses approximate periods from Morgan Stanley’s chartbook (p.8, as of 2025-12-31). The new closing high in 2020 occurred on August 18. The deeper financial-crisis decline also took longer to recover, but two episodes do not establish a general relationship between depth and recovery time.
See how long a holding stayed below its peak in the MDD and recovery analyzer. It uses closing prices excluding dividends, so results can differ from a backtest with reinvested dividends.
Is a lower MDD always better?
No. Falling less does not tell you how much your money grew. Use CAGR to examine growth, volatility to examine the spread of returns, and MDD with recovery duration to examine the depth and length of losses.
If KRW 100 million falls to KRW 40 million and you must sell to cover living expenses, a later recovery will not become your return. How much you can lose and how long you can wait are separate questions. Consider both before investing money you will need soon.
Frequently asked questions
Does an MDD of -30% mean I am down 30% now?
No. It is the deepest observed decline from a previous peak. The investment may have recovered since then. Compare your purchase cost with current assets to measure your current gain or loss.
Does adding money to my account recover the investment loss?
It raises the balance but does not recover the loss through investment returns. Separate contributions from performance. This article assumes no cash flows.
Can a percentage gain recover a 100% loss?
No finite percentage gain can restore zero remaining capital. Without new money, multiplying zero by a growth factor still gives zero.
Does a historical -20% MDD limit future losses to 20%?
No. It describes the past observation period, not a future loss limit or probability. A different period or more frequent data can show a deeper drawdown.
Sources and calculation basis
Sources checked: 2026-10-22. Asset paths and recovery gains are hypothetical arithmetic examples without cash flows. They are not actual product returns or recovery forecasts. Taxes, costs, dividends, inflation and FX are excluded.
Hypothetical examples use KRW without FX conversion. Returns in the hypothetical examples display two decimals. Historical market examples use USD price-index closes, excluding dividends. Figures with different dividend, currency or observation-period settings are not directly comparable.
- CFA Institute · The History and Economics of Stock Market Crashes (2009), Appendix A, p.161 — running peak and drawdown formula.
- CFA Institute · Performance Drawdowns in Asset Management (2018) — prior-peak calculation and historical limitations.
- Morgan Stanley · Drawdowns and Recoveries (2025-05-21) — drawdown and recovery concepts; a study using intraday prices.
- Morgan Stanley · Market Corrections, p.8 — historical episodes as of 2025-12-31.
- S&P Global · Daily Update (2020-08-20) — the new closing high on 2020-08-18.