Drawdowns and recovery arithmetic
The climb back uses a smaller base.
A 50% fall needs a 100% gain to return to the starting value. Understand the changing denominator, read a peak-to-trough path, and recognize the limits of a historical drawdown.
Keep track of the preceding peak
A drawdown measures a decline from an earlier running peak. In an invented path of $100, $120, $90 and $108, the peak is $120 and the deepest decline is $30, or 25%. The final $108 is above the original $100 but still 10% below the peak. Maximum drawdown describes the deepest such decline observed in a specified window; it is not the same as the return between the window’s endpoints.
Change the denominator when recovering
After a $100 investment falls 25%, $75 remains. Recovering the missing $25 requires $25 divided by $75: a gain of one third, or about 33.33%. Gaining 25% instead would reach only $93.75. For a fractional loss L below 1, the required gain is L divided by (1 − L). This assumes no contributions, withdrawals, fees or distributions and no leverage.
Read the total-loss boundary honestly
At a 100% loss, the balance is zero. No finite percentage gain on zero restores the starting amount. Adding new money would be a new contribution, not recovery of the original investment return. An investment can suffer a permanent loss, including through business failure. The exercise calculates a required gain; it provides no probability or timetable for achieving it.
Ask what the history leaves out
A drawdown based on month-end observations can miss a deeper fall between those dates. A sample that starts after a peak or excludes a failed asset can understate the experience. State the observation frequency, period, treatment of distributions and costs, and whether flows are removed from the return series. A past maximum is not a future loss limit. Before comparing strategies, examine recovery time and unrecovered periods as well as the single worst percentage.
Work out the climb back
A hypothetical investment peaks at $100. Choose a loss to see the gain needed to regain that peak, with no new money, distributions, fees or leverage.
- Peak value
- $100.00
- Value after loss
- $75.00
- Gain needed to recover
- 33.33%
A 25% gain after this 25% loss reaches only $93.75. Regaining $100 requires 33.33% on the smaller $75.00 balance.
Required gain = loss ÷ remaining value. Display rounds to two decimals; a required gain is neither a forecast nor a recovery timetable.An investment falls from $100 to $50, then gains 50%. Where does it end?
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Educational draft · Updated 11 October 2026 · Report a correction