Reading Crashes and Recoveries: Maximum Drawdown (MDD) and Time to Regain the Peak

Drawdown and maximum drawdown

When describing how far a stock or index has fallen, the reference is usually its highest value so far. Drawdown is today's value ÷ the highest value up to today − 1; it is 0 on days that set a new high and negative on all others. Plotting it day by day gives the drawdown curve, also called an underwater chart, as if measuring how deep below the surface you are. Maximum drawdown (MDD) is the deepest point of that curve within a given period. If return says 'how much you made in the end', maximum drawdown says 'how deep a hole you had to cross along the way'. With the same return, a path with a larger maximum drawdown is much harder to sit through.

The asymmetry of loss and recovery

The percentage you lose and the percentage you need to get it back are not the same. Going from 100 to 50 is a 50% loss, but going from 50 back to 100 takes a 100% gain. In general, after losing d, the gain needed to recover is 1 ÷ (1 − d) − 1. The deeper the drawdown, the faster the required gain grows. So recovering from a small drawdown and from a large one are different in kind, and an asset that has fallen very far tends to take a long time to regain its old peak.

• −10% → +11.1% to recover
• −20% → +25%
• −30% → +42.9%
• −50% → +100%
• −80% → +400%

Decline, recovery and total underwater period

'How long did it take' is also confusing as a single number. It is usually split into three parts: the decline period from peak to trough, the recovery period from trough until the previous peak is exceeded, and the total underwater period combining both. Declines are often short and recoveries long, and recovery periods can differ greatly even for the same depth. The figure below shows the three parts with example prices. The top panel is price; the bottom panel is each day's drawdown from the peak.

Long recoveries in real records

Even major indices have taken a long time to regain their peaks. Measured with this site's Index Crash & Recovery tool over full Yahoo Finance daily records, the S&P 500 regained its September 1929 peak only in September 1954 (about 25 years), the Nasdaq Composite regained its March 2000 peak in April 2015 (about 15 years), and the Nikkei 225 surpassed its end-1989 peak in February 2024 (about 34 years). These figures are for price indices without dividends. Assuming dividends were reinvested, recoveries would be faster; measured in real terms after inflation, they could be slower. There are also cases where the peak was regained within months after a deep fall. What matters is not an average recovery time but how wide the range of recovery times is.

What changes the recovery time

The same decline can have different recovery times depending on what you measure. Price index versus dividend-inclusive index, local currency versus converted currency, lump sum versus regular contributions each produce a different recovery point. Someone who keeps contributing can see their principal recover before the index regains its peak, thanks to units bought cheaply during the decline. Individual stocks vary far more than indices. An index continues by dropping members and adding new ones, but an individual company may never regain its peak or may be delisted. That is why an index's recovery record should not be applied directly to individual stocks.

• Dividends: reinvesting dividends speeds recovery
• Currency: converting to won lets the exchange rate change drawdown and recovery
• Inflation: in real terms recovery can be slower
• Contributions: continued buying changes when your principal recovers
• Index versus stock: an index carries on through member changes, but a single stock may never recover

Reading maximum drawdown in a backtest

In a backtest, which tests a trading rule on past prices, maximum drawdown is as important as return. Comparing the rule's maximum drawdown with that of simply holding shows both how much of the decline the rule avoided and how much of the rise it gave up in exchange. But maximum drawdown is only the deepest value along one past path; it does not mean a deeper fall cannot come. If a rule's maximum drawdown changes a lot when you change the period, the number is hard to trust. Look at how long the strategy stayed underwater as well as how deep it went. Other backtest pitfalls are covered in the guide on how to read backtest results.

Translating drawdown into your own situation

Maximum drawdown as a percentage often does not feel real. Converting it into your own money is more practical. For example, if 10 million won goes through −40%, it becomes 6 million won, and getting back to 10 million requires +66.7%. If you need that money for living costs or a large expense during that time and have to sell, the loss becomes final. So drawdown and recovery time should be considered not only as 'how risky is this asset' but together with 'when will I need this money'. Keeping money you need within a few years in an asset that could take years to recover is a risk separate from return. For why judgment wavers in falling markets, see the guide on recurring biases that shake judgment.

Using the tools on this site

This site's Index Crash & Recovery tool lets you pick the KOSPI, S&P 500, Nasdaq, Nikkei, Dow or any stock and, using full Yahoo Finance daily records, shades declines on a log price chart and shows the drawdown curve, a list of declines beyond a threshold (10%, 20%, 30%) with peak, trough, recovery date and recovery time, the current drawdown, and 6-month and 1-year returns after similar falls alongside a baseline from all month-ends. The Stock Strategy Backtester compares a rule's return, maximum drawdown and win rate with holding, using real historical prices of Korean and foreign stocks and ETFs. Keep in mind that past cases usually number from a few to a dozen or so, so one or two cases can change the result a lot.

Limits and disclaimer

The figure in this guide uses example prices to show the principle; it is not a record of real assets. The real index recovery times were measured by this site's tool from Yahoo Finance records; peaks before records begin are unknown, and dates can differ slightly between data providers. Past declines and recoveries do not tell you how deep the next decline will be or when it will recover. This guide explains how to read drawdowns and recovery times, does not recommend trading any asset and is not investment advice.