What Is a Drawdown? Maximum Drawdown Explained With S&P 500 Examples

A drawdown is the fall in an investment's value from its highest point to a later low, in percent; the deepest such fall over a period is the maximum drawdown.

Drawdown is the risk measure that matches how losses feel: how far below the last high an investment sits, and for how long. This page covers the definition, how drawdown is calculated, two worked examples from the S&P 500's daily closes, why recovering from a loss takes a larger gain than the loss itself, how drawdown differs from volatility, and where Kresmion shows it. It is descriptive throughout.

The definition

Three points describe every drawdown:

• The peak, the highest value reached before the decline.
• The trough, the lowest value reached before a new high.
• The recovery, the first time the value closes back at or above the old peak.

The drawdown at any moment is the current value divided by the running peak, minus 1. It is zero at a new high and negative everywhere else. A chart of that number through time is called an underwater chart, because everything below the zero line is time spent below a previous high. The maximum drawdown is the lowest point of that chart: the worst peak-to-trough fall in the period.

How it is calculated

Walk through the prices in date order and keep track of the highest value so far. On each day, divide the price by that running peak and subtract 1. The most negative result is the maximum drawdown.

For a price that goes 100, 120, 90, 110, 130, 104:

The maximum drawdown is minus 25 percent, from 120 to 90, even though the series ends above where it started. Day 5 is the recovery from the first drawdown, because it closes above the old peak of 120.

Two worked examples from the S&P 500

The figures below come from the S&P 500's daily closing values as published by the Federal Reserve Bank of St. Louis (FRED series SP500).

The two episodes show why depth alone is not the whole picture. The 2020 fall was deeper and took 23 trading sessions; the index closed above its old peak 181 calendar days after it was set. The 2022 fall was shallower, took most of a year to reach its low, and the index did not close above the January 2022 peak for 746 calendar days. In the series as downloaded on 1 October 2026, whose daily history starts on 3 October 2016, the 2020 episode is the maximum drawdown.

These are price-index figures: they exclude dividends, so with dividends reinvested an investor would have regained the old peak value no later than the dates in the table, and in practice somewhat sooner.

Why recovering takes a bigger gain

A loss and the gain needed to undo it are not the same size, because the gain is measured from the lower base. Written as a fraction d (0.25 for 25 percent), the gain needed to recover is 1 / (1 minus d) minus 1.

The gap widens quickly as the drawdown deepens. That is one reason deep drawdowns on concentrated holdings can take years to recover, and some never do.

Drawdown is not volatility

Volatility, the standard deviation of returns, measures how much returns swing around their average, counting rises and falls alike. Drawdown measures only the path below previous highs, and it depends on the order in which returns arrive: the same set of daily returns rearranged can produce a very different maximum drawdown. Two investments with equal volatility can have very different worst falls, which is one reason the Sharpe ratio, built on volatility, is often read next to the maximum drawdown. The Calmar ratio combines the two ideas, dividing annualised return by the absolute size of the maximum drawdown, commonly over the last three years.

Where Kresmion shows drawdowns

Kresmion's drawdown tracker, part of the signed-in workspace, lists about sixty assets across crypto, equities, indices, sectors, commodities and FX. For each one it shows how far the latest price sits below the all-time high, the date of that high, the days since it, and the maximum drawdown, computed from each asset's full daily closing history. It also marks a fixed reference depth for each asset class, which is a comparison line rather than a forecast.

For a portfolio, the Risk section of Kresmion's portfolio analytics shows the maximum drawdown of the holdings you enter over the selected window, and an underwater chart of the distance below the running peak, once there are at least 20 daily returns. Both need a Kresmion account.

Honest limitations

A maximum drawdown is a fact about one past window. A window that contains a shorter one can only show a deeper or equal maximum drawdown, never a shallower one, and figures for windows covering different dates are not comparable. Daily closes miss intraday lows, and price indices miss dividends. Figures are in nominal terms, not adjusted for inflation. And the worst drawdown in a history is not a floor: a later decline can be deeper than anything in the record.

Key takeaways

Frequently asked questions

What is the difference between a drawdown and a loss?

A loss is measured from what was paid. A drawdown is measured from the highest value reached, so an investment can be in a drawdown while still above its purchase price, as day 6 in the table above is: below its peak of 130, above its start of 100.

What is maximum drawdown?

The largest peak-to-trough fall over a stated period, in percent. It is the lowest point of the underwater chart. It depends entirely on the period chosen, so it should always be quoted with its dates.

How long does it take to recover from a drawdown?

There is no fixed time. In the S&P 500 examples on this page, the index took 181 calendar days to close above its 2020 peak and 746 days to close above its 2022 peak, and a deeper fall needs a disproportionately larger gain to recover.

Is a drawdown the same as a correction?

A correction is a drawdown of a particular size: market commentary uses the word for a fall of roughly 10 percent or more from a recent high. Drawdown is the general measure, and covers any size of fall.

Does a past maximum drawdown limit future losses?

No. It is the worst fall within the history measured. A later decline can be deeper.

This page is information, not investment advice.

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Source: S&P Dow Jones Indices, S&P 500 daily close (FRED series SP500, downloaded 1 October 2026), https://fred.stlouisfed.org/series/SP500 ; drawdowns, recovery dates and recovery gains computed by Kresmion from that series ; Kresmion drawdown tracker and portfolio analytics.

Kresmion Research.