Key takeaways
- The maximum drawdown is the largest drop from an interim high to the lowest point after it.
- It shows the worst paper loss your portfolio went through in the history under review.
- Talantor calculates it on the time-weighted value index - so regardless of whether you paid money in or took it out along the way.
What is the maximum drawdown?
The maximum drawdown answers the question: how deep did it go from peak to trough? If your portfolio climbs to a new high and then falls, the drawdown grows until a new high is reached. The maximum drawdown is the largest of these drops over the entire period - always as a negative percentage.
Unlike volatility, which measures fluctuations in both directions, the drawdown looks only at the loss side. That makes it very tangible: it corresponds to the largest loss in value you would have had to endure if you had bought in at the worst possible moment and sold at the low.
A simple example
Suppose your portfolio index rises to 100, then falls to 80 and later recovers. The drop from 100 to 80 is a drawdown of 20%. If the index does not reach a new high in between but falls further to 70, the drawdown grows to 30%. The lowest point relative to the previous high determines the value.
How Talantor calculates it
Talantor uses your portfolio's time-weighted value index. This matters because a deposit raises your balance without the market having risen - and a withdrawal lowers it without anything having lost value. The time-weighted index filters out these cash flows and shows the pure performance. That way the drawdown really measures market risk and not how much you save.
Recovery takes more than the loss
A drawdown of 50% is particularly treacherous: to make it up, you then need a rise of not 50% but 100%. The deeper the trough, the disproportionately longer the recovery takes - a good reason to limit large drawdowns through diversification.