Maximum Drawdown.

In plain English

Maximum drawdown is the worst peak-to-trough fall an investment suffered over a stretch of time. You find the highest value it reached, then the lowest value after that peak, and measure the percentage drop between them. It tells you the deepest hole the investment put you in, which is often what actually rattles people into selling at the bottom. A fund with steady returns but a 50 percent maximum drawdown asked its owners to stomach losing half their money on paper. It is a plain way to see worst-case pain, not just average returns.

01Why it matters

Average returns hide the gut-check moments; maximum drawdown shows the deepest loss you would have had to sit through without panic-selling, which is the test most people actually fail.

02The math, step by step

An investment climbs to a peak of $10,000, then falls to $6,000 before recovering. The drop from $10,000 to $6,000 is $4,000, or 40 percent. Its maximum drawdown is 40 percent. Even if it later grew past $10,000, knowing it once cost owners 40 percent on paper tells you whether you could have held on through that stretch.

03What this is NOT

04Receipts

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