Pro Investor Academy
Beginner
6 min read

Understanding Drawdowns

A drawdown is the decline from a previous high, and recovery arithmetic is not symmetrical.

The short answer

A drawdown is the decline from a previous peak to a subsequent trough, and because percentage losses and gains are not symmetrical, a large decline requires a proportionally much larger gain just to break even. This asymmetry is why avoiding catastrophic losses matters more than capturing every possible gain.

What you'll learn

  • Define maximum drawdown
  • Calculate the gain required to recover from a stated percentage decline
  • Explain why recovery arithmetic is asymmetrical

Optional supplemental lesson. It doesn't count toward the certificate. Suggested after Lesson 5.2: Diversification.

Back to Lesson 5.2

The definition

Maximum drawdown measures the largest peak-to-trough decline over a period. It is the number that describes what holding an investment actually felt like.

Recovery arithmetic

A 20% decline requires a 25% gain to return to break-even. A 50% decline requires a 100% gain. A 90% decline requires 900%.

This asymmetry is why avoiding catastrophic losses matters more than capturing every gain.

Expect them

Declines are a normal, recurring feature of investing rather than a malfunction. Broad markets have experienced substantial declines many times, and diversified investors who remained invested experienced recovery over long periods — though no recovery is guaranteed and past behaviour does not guarantee future results.

Recovery gain required after a decline
20% declinerequires a 25% gain
50% declinerequires a 100% gain
90% declinerequires a 900% gain

The formula is gain = decline / (1 - decline). Losses and the gains needed to reverse them are not symmetrical.

Why this matters

An expected decline is survivable. A surprising one gets sold at the bottom.

Terms used in this lesson

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Check your understanding

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1. What gain is required to recover from a 50% decline?

0 of 1 answered. Answer every question to see the answers.

Key takeaways

  • Maximum drawdown measures the worst peak-to-trough decline over a period
  • The gain required to recover grows faster than the decline itself
  • A 50% loss needs a 100% gain to break even
  • Declines recur throughout market history; expecting them makes them survivable

Related concepts

Written by
Pro Investor Academy Research Team
Content type
Educational article
Published
2026-09-13
Last reviewed
2026-09-13

Sources

Concentration RiskWhat Happens When Markets Crash

Educational content only. This lesson is not investment, tax or legal advice and does not recommend buying or selling any specific investment. All investing involves the risk of loss.