The largest peak-to-trough decline in a portfolio's value over a specific period — the worst loss that would have been experienced by an investor who bought at the high and sold at the low.
Deeper Explanation
Maximum drawdown is arguably the most practically important risk metric for investors who must maintain the psychological composure to stay invested. A strategy with a 50% maximum drawdown requires a 100% subsequent gain just to break even — and most investors do not have the behavioural resilience to hold through a 50% drawdown in practice. Marks's career advice: understand your personal maximum drawdown tolerance before constructing a portfolio, not after. A portfolio that matches your psychological tolerance allows you to hold through volatility; one that exceeds it will be liquidated at the worst possible moment, converting a temporary paper loss into a permanent capital loss.
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