How to Calculate Portfolio Drawdown: Formula and Example

To calculate portfolio drawdown, compare its current value with the highest value it reached earlier in the period. If a portfolio peaked at $12,000 and later fell to $9,000, its drawdown was 25%. That is different from measuring the loss against the original amount invested.

Drawdown describes a loss along a portfolio's path. Maximum drawdown is the deepest peak-to-trough decline in a chosen period. Both depend on the dates and value series you use.

For a two-value comparison, use the portfolio drawdown and loss-recovery calculator. Enter a previous peak and the current value to calculate the decline and the gain needed to regain that peak. It does not calculate maximum drawdown from a full history.

How to calculate portfolio drawdown

For each date, find the highest portfolio value recorded up to that date. Then compare the current value with that running peak:

Drawdown = (current portfolio value ÷ previous peak) − 1

The result is negative. You can also express the loss as a positive number:

Drawdown percentage = (previous peak − current value) ÷ previous peak × 100

For example, if a portfolio's previous peak was $12,000 and its value later reached $9,000:

• Dollar decline from the peak: $12,000 − $9,000 = $3,000
• Drawdown: $3,000 ÷ $12,000 = 25%
• Signed version: ($9,000 ÷ $12,000) − 1 = −25%

The starting value does not set the drawdown unless it is also the highest value so far. If the portfolio began at $10,000, rose to $12,000, then fell to $9,000, it is down 10% from its starting value but 25% from its peak.

How to find maximum drawdown

You need a dated series of portfolio values, not just its beginning and ending values.

1. Choose a measurement period and a consistent value series.
2. For each date, record the highest value reached from the start of the period through that date.
3. Calculate the drawdown from that running peak for every date.
4. Find the most negative result. Its absolute size is the maximum drawdown for that period.

Suppose the series reaches $10,000, climbs to $12,000, falls to $9,000, then rises to $11,000. The fall from $12,000 to $9,000 is a 25% drawdown. The later rise does not erase the earlier decline; it shows that the portfolio has recovered part of it. At $12,000, it has recovered to the prior peak. Above that value, the running peak resets.

Drawdown duration adds a time measure. One common convention counts from the peak until the portfolio returns to that level. State the convention and observation frequency. If the value has not regained the peak by the end of the series, report that recovery was not observed within the selected period.

Why a loss needs a larger gain to recover

The recovery percentage uses the lower value as its base. After a 25% drawdown from $12,000 to $9,000, the portfolio needs to gain $3,000 on $9,000, or 33.3%, to return to $12,000.

For a loss of *L* expressed as a decimal, the required gain is L ÷ (1 − L). This is arithmetic, not a forecast: it says how large a gain would offset the loss, not whether or when that gain will occur.

Drawdown, maximum drawdown, and volatility

A drawdown tracks how far a portfolio has fallen below a prior high. Maximum drawdown reports the largest such fall in the selected period. Volatility describes variation in returns; it does not require a fall from a prior peak.

These measures answer different questions. A portfolio can have a large peak-to-trough decline even if its ending value looks strong, and a volatile series can finish near its starting point. No single measure describes every kind of investment risk. The CFA Institute's portfolio performance reading covers maximum drawdown and drawdown duration among several performance measures.

What changes the drawdown result?

The period and frequency of observations matter. Daily values can capture a decline that begins and recovers between month-end observations; monthly values may miss it. CFA Institute notes that measurement frequency can change the measured drawdown. State whether your series uses daily or monthly observations and keep that choice consistent when comparing results.

The value series matters too. Adjustments for dividends can make a total-return series differ from raw closing prices. Deposits, withdrawals, fees, and taxes can change an account's net path as well. For a real account with cash flows, a raw balance change can confuse investment performance with added or removed cash. Choose a method that treats those flows consistently, and do not compare results built on different assumptions.

Equity Replay is an educational historical simulator. It applies selected stock or ETF weights at the start of a period and follows available closing-price changes. It does not include dividends, fees, taxes, deposits, withdrawals, or ongoing rebalancing. You can use the portfolio builder to inspect an allocation's historical path, then read how to compare portfolio performance over time and how the simulator works for the assumptions. The chart is not a live account, a record of trades, or investment advice.

Report the assumptions with the number

Calculate each decline from the highest earlier value, not automatically from the original investment. Maximum drawdown is the largest peak-to-trough loss in the chosen series and window. When you report it, include the period, observation frequency, and price or return basis. Without those details, two drawdown figures may not be comparable.

For more context, see the guide to benchmarking a stock portfolio and the explanation of time-weighted and money-weighted returns. Drawdown adds a view of the path between peaks; it does not tell you what to buy or predict the next one.

Sources and further reading

• CFA Institute: Portfolio Performance Evaluation
• CFA Institute: Maximum Drawdown and Optimal Portfolio Strategy