Maximum Drawdown

Maximum drawdown is the largest historical decline in your portfolio. Index Balance calculates it automatically so you know the real worst-case scenario.

Definition

Maximum Drawdown (MDD) is the largest peak-to-trough percentage decline recorded throughout the entire history of a portfolio. It represents the worst-case scenario an investor would have experienced if they had bought at the worst possible moment and sold at the worst subsequent point.

It is a key metric for evaluating the real risk of an investment strategy. An investor should ask: "Could I emotionally withstand a decline of this magnitude without selling?" If the answer is no, the portfolio carries too much risk for their profile.

The MSCI World's maximum drawdown since 1970 exceeds -50% (the 2008-2009 crisis). Any investor in global index funds must be aware that this magnitude of decline is possible, and that recovery, while historically guaranteed, can take years.

Practical example

A portfolio with €20,000 invested in MSCI World at the start of 2008 would have seen its value fall to approximately €10,800 by March 2009, a maximum drawdown of -46%. Full recovery did not arrive until late 2012, four years after the original peak.