Your $10,000 portfolio falls 50%, then rises 50%. Are you back to even?
The loss leaves $5,000. A 50% gain adds half of that: $2,500. You end with $7,500, still $2,500 short.
Equal percentages do not cancel when the starting amounts change. The gain works on a smaller pile of money than the loss did. Getting back to even takes a bigger percentage gain, and the wait can matter as much as the missing dollars.
Measure from the last high
A drawdown is the percentage decline from your running peak: the highest value observed so far in the path you are measuring, including the current observation. A new high resets drawdown to zero. Your purchase price and January 1 balance do not reset the peak.
For a portfolio, use cash-flow-adjusted total returns: include cash and investment income, but remove the effect of deposits and withdrawals. A deposit can refill your account without earning back a loss.
Our wealth index starts at 100 and grows or shrinks with those returns. Assume month-end values of 100, 120, 90, 108 and 121 across months 0–4. Our examples use USD before fees and personal taxes, with no inflation adjustment or money added or withdrawn.
At 90, the drawdown is (120 − 90) ÷ 120 = 0.25, or 25%. The index is only 10% below its original 100, but it has lost a quarter of the wealth it reached at 120.
The peak moves up with you; it does not move down to make a loss look smaller. We write the loss as a positive 25%; an underwater chart may write −25%.
Recovery starts from a smaller base
A 20% loss turns $100 into $80. Recovering the missing $20 requires a gain of $20 ÷ $80 = 25%. You divide the amount lost by what remains.
That gives the recovery gain, the percentage growth needed to return to the old value. For a loss below 100%:
For a 50% loss, use 0.50: 0.50 ÷ (1 − 0.50) = 1, or 100%. The $5,000 left after the opening loss must double to restore $10,000.
Starting with $100, the calculated recovery gains are:
| Loss | Value left | Gain to recover |
|---|---|---|
| 10% | $90 | 11.11% |
| 20% | $80 | 25% |
| 30% | $70 | 42.86% |
| 50% | $50 | 100% |
| 80% | $20 | 400% |
| 100% | $0 | No finite gain |
Gains are rounded to two decimal places where needed. An 80% loss leaves just $20 working to replace the missing $80. The deeper the loss, the steeper the climb.
At zero, there is nothing left to compound. The formula tells you how much growth you need, not whether it will arrive: shares in a bankrupt company can become worthless.
Read the depth and the duration
In the five-point path, the index reaches 120 in month 1, then falls to its trough, the low point of this decline, at 90 in month 2. The dashed line holds at the old peak during the fall and rebound. Only month-end values are known; the lines connect them.
The maximum drawdown is the largest peak-to-trough percentage decline within the measured period. Here it is 25%, from 120 to 90, over months 0–4.
From the trough, regaining 120 takes 30 ÷ 90 = 33⅓%. At month 3, the index has climbed to 108: a 20% rally from 90, yet still 10% below 120. Rising and recovered are different things.
Two clocks describe the same episode:
- Time underwater runs from the peak to the first observed return to that level or higher: month 1 to month 4, or three months.
- Trough-to-recovery time starts at the low point: month 2 to month 4, or two months.
Month 4's value of 121 clears the old peak and sets a new one. Stop the record at month 3 and the recovery is still unfinished. You can measure the wait so far, but you cannot give it an end date.
The ending return is 121 ÷ 100 − 1 = 21% over four months. That gain hides the quarter of peak wealth that disappeared along the way. Depth tells you how much was lost; duration tells you how long the old high stayed out of reach.
History does not set a loss ceiling
Worst so far does not mean worst possible. The next decline can be deeper, and the next spell underwater can last longer.
Even the start date changes the answer. Start a fresh measurement at month 2, ignoring earlier values, and the path is 90, 108, 121. Its maximum drawdown is 0%. The investment did not become safer; the shorter record left out the fall.
Daily closes can reveal a deeper decline than month-end values show. Price-only, total-return and inflation-adjusted series can also recover on different dates. When comparing losses or reading market history, match the dates, observation frequency and kind of return before comparing the percentages.
Depth and duration help you assess whether your asset allocation, the mix of stocks, bonds and cash, fits the spending it must support. A portfolio can be profitable since its starting date and still be a poor match for next month's bill.
What money will you need before a recovery could occur? Accepting a loss to meet a real obligation is not a failure of discipline. If the portfolio must keep paying you while it is down, sequence risk explains how ongoing withdrawals change the problem.
In short
- Drawdowns measure losses from the running peak. Adding money does not erase an investment loss.
- Recovery requires a larger percentage gain than the loss: 50% down needs 100% up.
- Time underwater starts at the peak; trough-to-recovery time starts at the low point. Both end at the first observed recovery.
- The worst observed loss is not a future loss limit, and recovery is not promised.