Definition of drawdown
Drawdown measures the loss of an investment from its last high (peak) to the subsequent low (trough), before a new rise. It is expressed as a percentage.
The loss / recovery asymmetry
The most important concept about drawdown is its asymmetry: you always need a proportionally larger gain than the loss to break even. This is the mathematical reason why limiting losses is more effective than optimising gains.
| Drawdown suffered | Gain needed to recover | Assessment |
|---|---|---|
| −5% | +5.3% | Easily recoverable |
| −10% | +11.1% | Reasonable |
| −20% | +25% | Significant |
| −30% | +42.9% | Difficult |
| −50% | +100% | Very difficult |
| −70% | +233% | Exceptional gain required |
Drawdown and recovery calculator
Maximum drawdown (MDD) — the risk indicator
The Maximum Drawdown (MDD) is the largest loss observed from a peak to the subsequent trough over a given period. It is one of the most widely used risk indicators among fund managers for comparing strategies.
| Asset / Strategy | Historical MDD | Recovery time |
|---|---|---|
| European large-cap index (2008 crisis) | −59% | ~6 years |
| European large-cap index (COVID 2020) | −38% | ~8 months |
| Average Euronext Growth small cap | −40 to −70% | Variable |
| MSCI World ETF (2000-2003) | −50% | ~6 years |
| Diversified 15-line portfolio (active) | −15 to −30% | 1-3 years |
Calmar ratio — drawdown-adjusted return
The Calmar ratio divides the annualised return by the maximum drawdown. The higher it is, the better the quality of the return relative to the risk taken:
Screener Small Caps track record: the ML screener publishes its risk-adjusted performance on the public track record page, always shown alongside a broad equity benchmark and the appropriate statistical reserves. Past performance is not a guide to future returns.
How to limit drawdowns on small caps
On Euronext Growth small caps, drawdowns can be violent in a single session (a disappointing set of results = −20 to −40% in one day). The levers to limit them:
- A systematic stop-loss — defined before entry, just below a technical support level. See the stop-loss guide.
- Reasoned sizing — never concentrate more than 10-15% of the portfolio in a single stock. Use the Kelly criterion for the optimal calculation.
- Avoid stocks below the MA200 — the screener's Momentum pillar filters out stocks in a structural downtrend.
- Trim ahead of risky announcements — a small position into an uncertain set of results avoids a brutal drawdown.
- Sector diversification — 15-20 uncorrelated lines limit the impact of a sector shock.