Understanding Maximum Drawdown: Definition and Importance in Investing
Maximum Drawdown definition
Maximum drawdown measures the largest single drop from peak to bottom in an investment’s value. An asset or investment strategy suffers a drawdown when it loses money. Investors in a fund with a max drawdown of 50% saw their portfolios lose half of their value.
The maximum drawdown duration is the longest it has taken for the equity curve to recover losses.
Investors should select investments with the lowest possible maximum drawdown. Investments with Maximum Drawdown between 5% and 20% are considered safe investments.
In the example below the fund experienced -13.35% maximum drawdown during the great financial crisis of 2008 while the US Stock market six times more at 65%.
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