There's a number on every portfolio fact sheet that almost nobody reads carefully. It sits next to the headline return, in smaller type, often abbreviated. Most retail investors glance at it and move on.

It's called maximum drawdown. It's the single most predictive number for whether you'll actually stay invested in a portfolio long enough to capture the returns it advertises.

If you can only learn one risk measure, learn this one. Sharpe, Sortino, beta, alpha all matter. Max drawdown is the one that tells you what the worst experience of owning the portfolio actually felt like.

What max drawdown actually measures

Maximum drawdown is the largest peak-to-trough decline in a portfolio's value over a given period.

If a portfolio rises from $10,000 to $15,000, then falls to $11,000, then climbs back up, the max drawdown for that period was $4,000 from peak ($15,000 to $11,000), which is 26.7%. Max drawdown is always reported as a percentage, almost always as a negative number.

The "max" part means it's the worst single drawdown, not an average. Even if a portfolio has dozens of small drawdowns and one big one, the big one is what you'll see reported.

It's a measure of pain. Specifically, the maximum amount of pain that an investor who held the portfolio over the measurement period actually felt at the worst moment.

Why this matters more than the average return

Most investors don't fail to capture market returns because the returns aren't there. They fail because they sell during a drawdown and miss the recovery.

The S&P 500 has averaged around 10% annual returns over the long run. The average individual investor has earned closer to 5% to 6%. Where does the missing return go? Into the gap between holding through drawdowns and selling during them.

A portfolio with a 12% average annual return and a 70% maximum drawdown is a worse portfolio than one with a 10% average return and a 30% maximum drawdown for one simple reason: most people will sell out of the first portfolio when the drawdown hits. They won't capture the long-term return the math promises. They'll lock in the loss instead.

This is why max drawdown is the most behaviorally important number on a fact sheet. The headline return is only achievable if you stay invested. Max drawdown tells you how hard it will be to stay invested when things are bad.

A working example

Two hypothetical portfolios, both with 12% average annual returns over 25 years:

Portfolio A: 12% average return, max drawdown of -18%. The worst peak-to-trough loss was 18%. An investor would have seen their account drop from $100,000 to $82,000 at the worst moment, then recover. That's painful but survivable.

Portfolio B: 12% average return, max drawdown of -68%. The worst peak-to-trough loss was 68%. An investor would have seen their account drop from $100,000 to $32,000. That's the kind of decline where most people sell, lock in the loss, and never recover the missing performance.

Both portfolios produced the same long-term average return on paper. In practice, almost nobody captured Portfolio B's return. They sold somewhere on the way down, missed the recovery, and ended up well below the average. Portfolio A's lower drawdown made it survivable. Portfolio B's larger drawdown made it lethal in practice.

Common max drawdown numbers in major asset classes

For context, here are typical maximum drawdowns over long periods:

  • S&P 500 (1929 to today): Around 86% (during the Great Depression). For periods after WWII, the worst was roughly 56% in 2007 to 2009.
  • Long-term US Treasury bonds: Around 23% during the early 1980s rate cycle.
  • Diversified 60/40 stock/bond portfolio: Around 30% during 2007 to 2009.
  • Gold: Around 65% during 1980 to 2000.
  • Bitcoin: Multiple 80%+ drawdowns in its short history.

Notice that even "safe" asset classes have meaningful drawdowns. The S&P 500's worst-since-WWII drawdown (around 56%) is the realistic worst-case for someone who held an S&P 500 index fund through 2008. That's a brutal experience.

This is the context against which any portfolio's max drawdown should be read. A portfolio with a 30% max drawdown is meaningfully better risk-managed than the S&P 500's 56% in the same period. A portfolio with an 80% max drawdown is meaningfully worse.

What our portfolios show

We publish max drawdowns transparently:

  • Core 20: Max drawdown of about -34%. Lower than the S&P 500's -37% during the same period. The flagship portfolio's design (20 stocks, equal-weight, quality-tilted) produced a smoother ride than the index itself, which is unusual and is one reason we built it the way we did.
  • Market Masters: Max drawdown of about -53%. More concentrated, more growth-tilted, less diversified. Bigger swings on the way down match the bigger swings on the way up.
  • Tepper Tactical: Max drawdown of about -61%. The most aggressive of the three. The deeper drawdown is part of the trade-off for the higher long-term returns.

Each of these numbers reflects a real moment in real history when a real investor would have seen those losses on paper. The fact that the portfolios eventually recovered and produced strong long-term returns is meaningless if the investor sold during the drawdown.

How to use max drawdown in decision-making

The right question isn't "is this drawdown small?" The right question is "is this drawdown survivable for me?"

Different investors have different drawdown tolerances. Someone with a 40-year horizon, stable employment, and high savings can ride out a 60% drawdown. Someone two years from retirement with most of their savings in equities cannot.

A few practical heuristics:

Match your drawdown tolerance to your time horizon. The longer your horizon, the bigger drawdown you can survive. If you have 20+ years before you need the money, even a 50% drawdown is recoverable. If you have 5 years or fewer, a 30% drawdown could be terminal because you don't have time to recover before drawing down.

Run the drawdown through your income and lifestyle. If your portfolio dropped 40% tomorrow, would you still sleep? Could you keep contributing? Would you panic-sell? Honest answers to these questions matter more than abstract risk tolerance scores.

Consider drawdowns in dollar terms, not percentages. A 30% drawdown on $10,000 is $3,000. A 30% drawdown on $1,000,000 is $300,000. The percentage is the same. The emotional impact is wildly different. As your account grows, your effective drawdown tolerance often shrinks because the absolute dollar losses become more meaningful.

Don't pick portfolios with drawdowns you couldn't tolerate even if they have higher average returns. Tepper Tactical produced a higher long-term return than Core 20, but if a 60% drawdown would force you to sell, you shouldn't own Tepper Tactical. The only return you actually capture is the return on the portfolio you stay invested in.

What max drawdown doesn't tell you

A few caveats are worth flagging.

It doesn't tell you how long the drawdown lasted. A 30% drawdown that recovers in 6 months is very different from a 30% drawdown that takes 5 years to recover. The "underwater" period (time spent below the previous peak) is its own important metric, often called drawdown duration.

It doesn't tell you the path. A 40% drawdown that hit suddenly in one quarter is different from a 40% drawdown that dripped lower for two years. Both feel different to live through.

It's a single historical worst case. Future drawdowns can be larger. A portfolio with a 30% historical max drawdown could have a 50% drawdown in the future. Past drawdowns are evidence, not promises.

It's affected by the time period measured. A portfolio measured from 2009 to 2020 (mostly bull market) will have a smaller max drawdown than the same portfolio measured from 2007 to 2020 (which includes the 2008 crash). Always check what period the drawdown covers.

The bottom line

Maximum drawdown is the worst experience of holding the portfolio. It's reported as a single percentage, but it represents real moments when a real investor would have seen real losses in their account. Most investors fail to stay invested through their portfolio's max drawdown, and that's why most investors underperform their portfolios on paper.

When you're evaluating any portfolio, including ours, look at max drawdown alongside the headline return. Ask whether the drawdown is survivable for you given your time horizon, your income stability, and your ability to keep contributing during a downturn. The right portfolio isn't the one with the biggest historical return. It's the one whose worst moment you can survive.

That's the test. Most investors never run it. The ones who do tend to outperform the ones who don't, because they're not the ones panic-selling at the bottom.