Measure from the relevant peak
A fictional account grows from $100 to $120, falls to $90 and later recovers to $126. The drop from $120 to $90 is a 25% drawdown: $90 ÷ $120 − 1. The $100 starting value is not the denominator for that peak-to-trough calculation.
At $90, the account is down 10% from its original starting amount but 25% below its peak. Those statements are compatible. One measures the whole-period return from the initial value; the other measures the decline from the prior high.
Recovery percentages use the lower base
After falling from $120 to $90, returning to $120 requires a 33.33% gain: $120 ÷ $90 − 1. A 25% gain from $90 would reach only $112.50. The percentage required to recover grows faster as the loss becomes deeper.
In general, recovering a fractional loss L requires L ÷ (1 − L), assuming no intervening cash flows or costs. A 10% loss needs about 11.11% to recover; a 50% loss needs 100%. At a complete loss, no finite percentage gain on the zero balance restores the original capital.
Depth and duration answer different questions
A drawdown can be deep and short, shallow and prolonged, or both deep and prolonged. Time to regain the prior peak is a separate description from the worst percentage decline. A chart showing only the final return can hide both.
The observation frequency matters too. Monthly closing values can miss a larger decline that occurred and partly recovered inside the month. Likewise, using a price-only series rather than a total-return series changes what counts as the accumulated value. Name the method before comparing two historical drawdowns.
Past drawdown is not a future loss limit
A strategy whose worst recorded decline was 15% has not established that future losses are capped at 15%. A short sample, a favorable starting date or missing crisis history can all make the recorded path look more reassuring than the underlying risks justify.
For accounts with deposits and withdrawals, raw account balances also mix investment results with cash movements. Adding money can create an apparent recovery without the investments regaining their prior performance. Use a return-based series or another appropriate cash-flow-aware method for the question.
A value falls from $100 to $80. What gain is needed to return to $100?
Show the explanation
A 25% gain, because $100 ÷ $80 − 1 = 25%. A 20% gain on the smaller base would reach only $96.
Sources and editorial notes
Original explanations and hypothetical examples prepared with AI assistance. Primary references checked October 16, 2026. Numerical examples are hypothetical unless explicitly identified otherwise.
- Fidelity: What Is a Drawdown?
Peak-to-trough decline and the limitations of historical drawdown behavior.