The maximum drawdown calculator is invaluable for risk management, as it helps investors understand the magnitude of potential losses they might face.
Imagine an investment portfolio that starts at $100,000 and experiences the following changes:
- Peak value: $150,000 (January)
- Declines to: $90,000 (March)
- Recovers to: $120,000 (June)
- Falls to: $110,000 (August)
- Ends at: $140,000 (December)
The Maximum Drawdown would be 40% (from $150,000 to $90,000), representing the worst decline the investment experienced during the period.
Maximum Drawdown Calculator
| Investment Type | Initial Value | Peak Value | Trough Value | MDD % | MDD Amount |
|---|---|---|---|---|---|
| Conservative Bond Fund | $100,000 | $110,000 | $102,000 | 7.27% | $8,000 |
| Balanced Portfolio | $100,000 | $125,000 | $105,000 | 16.00% | $20,000 |
| Growth Stock Fund | $100,000 | $150,000 | $95,000 | 36.67% | $55,000 |
| Crypto Investment | $100,000 | $200,000 | $80,000 | 60.00% | $120,000 |
Maximum Drawdown Calculation Formula
The formula for calculating Maximum Drawdown is:
MDD = ((Peak Value - Trough Value) / Peak Value) × 100%- Peak Value: The highest point reached by the investment before a decline
- Trough Value: The lowest point reached after the peak before a new peak is established
- Percentage Decline: Expressed as a negative percentage
Initial Investment: $50,000 Peak Value: $75,000 Trough Value: $45,000
MDD = ((75,000 - 45,000) / 75,000) × 100%
= (30,000 / 75,000) × 100%
= 0.40 × 100%
= 40%How to Calculate Maximum Drawdown?
Calculating Maximum Drawdown involves several steps:
- Identify the Peak: Find the highest value in the investment period.
- Locate the Trough: Determine the lowest value after the peak.
- Calculate the Percentage Decline: Apply the MDD formula.
- Compare Multiple Drawdowns: Identify the largest drawdown over the period.
Let’s analyze a stock’s monthly closing prices:
January: $100
February: $120 (Peak)
March: $95
April: $80 (Trough)
May: $90
June: $110First Drawdown: ((120 - 80) / 120) × 100% = 33.33% Second Drawdown: ((110 - 90) / 110) × 100% = 18.18%The Maximum Drawdown would be 33.33%, as it represents the largest decline.
What is the Maximum Drawdown Amount?
The Maximum Drawdown Amount represents the actual dollar value lost during the worst decline. This absolute value helps investors understand the real impact on their portfolio.
Investment Portfolio:
- Initial Value: $200,000
- Peak Value: $250,000
- Trough Value: $175,000
Maximum Drawdown Amount = Peak Value - Trough Value
= $250,000 - $175,000
= $75,000What is a Good Maximum Drawdown
General guidelines for different investment styles:
- Conservative Portfolios: 5-10%
- Balanced Portfolios: 10-20%
- Aggressive Portfolios: 20-35%
- High-Risk Strategies: 35%+
References
Financial Analysts Journal: https://www.tandfonline.com/toc/ufaj20/current
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