Maximum drawdown
Maximum drawdown measures the largest loss from a peak to the subsequent trough. It is the most concrete risk indicator to test psychological resilience.
The maximum drawdown (MDD) is the most concrete risk indicator for a retail investor. It measures the largest decline from peak to subsequent trough over a given period. Unlike volatility (an abstract statistical figure), drawdown speaks in percentages of actual loss — what the investor would have lost if they had invested at the worst moment.
Major historical drawdowns
- MSCI World, 2008-2009 Great Recession: −57% (peak Oct 2007, trough Mar 2009)
- MSCI World, Dot-com bubble 2000-2002: −48%
- MSCI World, Covid-19 March 2020: −34% (recovery in ~6 months)
- S&P 500, 1929-1932: −86% (worst stock market crisis in history)
- Nasdaq 100, Dot-com 2000-2002: −83%
Psychological risk of drawdown
Historical statistics suggest equity markets always recover over long enough periods. But intellectual knowledge doesn't prevent emotional decisions. Seeing a €100,000 portfolio fall to €43,000 (as in 2008-2009) pushes many investors to sell at the bottom — permanently realising the loss. Testing your drawdown tolerance before investing is a fundamental step.
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