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LEARNAIMARKETS · AI-POWERED TRADING

Guide · Risk metrics

Maximum drawdown: the metric that decides if your strategy is viable

Maximum drawdown is the largest cumulative decline from a peak to a trough. Not the average loss — the realized worst case. That's why it determines whether you'll stay in the strategy when the next crisis hits.

  • Definition

    Max % drop from the last peak to the next trough. Measured as a percentage of the prior peak.

  • Why it matters

    It determines whether you abandon the strategy. Most capitulate between −20% and −30%.

  • How it's controlled

    Diversification, volatility guardrails and regime-based reallocation.

Formula and example

Formula and example

drawdown_t = (value_t / max(value_0..t)) − 1

If your portfolio is worth 100, rises to 130, then falls to 100, current drawdown is (100/130) − 1 = −23.1%. Max drawdown for the window is the minimum of all those values.

Historical drawdowns compared

S&P 500 vs balanced portfolio (60/40 + guardrails) across the last 3 major drawdowns.
Historical drawdowns S&P 500 vs balanced portfolio
PeriodS&P 50060/40 + guardrails
2008 (financial crisis)−56.8%−24.5%
2020 (Covid)−33.9%−12.1%
2022 (inflation + rates)−25.4%−17.8%

Approximate figures for educational purposes. Balanced portfolio includes bond exposure and regime reallocation.

How to choose your tolerable drawdown

  • Long horizon (>10 years): you can tolerate −30% to −40% if you don't need the money. Global equities, 80/20 allocation.
  • Mid horizon (5–10 years): target −15% to −25%. Balanced 60/40 with tactical reallocation.
  • Short horizon (<5 years): target −5% to −12%. Short bonds, gold, cash; minimal equities.

Frequently asked questions

What is maximum drawdown?

It's the largest percentage decline from a peak to the next trough in the value of a portfolio or strategy. It measures the worst cumulative loss you would have suffered if you entered at the worst moment.

How is it computed?

At each time step: drawdown = (current value / prior max) - 1. Maximum drawdown is the minimum across all drawdowns in the analysis window.

What drawdown level is tolerable?

It depends on horizon and profile. 100% equity portfolios typically see -30% to -55% in crises. Balanced portfolios using UCITS ETFs with guardrails contain worst case between -15% and -25%.

Why does it matter more than annual return?

Because it psychologically determines whether you abandon the strategy. A 12% CAGR with -45% drawdown is unsustainable for most investors. An 8% CAGR with -15% max is sustainable.

How does LearnAImarkets control it?

With volatility guardrails (VIX), walk-forward validation, and a monthly selection of the three Core12 UCITS ETFs with the strongest signal. Goal: contain drawdowns without sacrificing risk-adjusted return.

See how the model manages risk

The public backtest shows historical drawdown of the strategy with guardrails active.
See backtest How it works

This content is educational. Not investment advice. Past results do not guarantee future returns.

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