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Stock Market Drawdowns

Investors must accept their stocks will be underwater from portfolio high watermarks most of the time.

17 Jan 2020

Please read carefully the disclaimer, which appears at the end of this document.

Investors must accept their stocks will be underwater from portfolio high watermarks most of the time.

What are drawdowns?

It measures the peak-to-trough decline in the value of a portfolio before a new peak is achieved.1 A maximum drawdown (MDD) is the maximum loss of an investment during a specific period and is highly relevant as it is an important indicator of downside risk.2

MDD(T) = (P-L)/P

P = Peak value before largest drop    L = Lowest value before new high established

Source: “The Formula: Maximum drawdown” (2018). Robeco

Stocks do not make new highs every day and so the outcome is the investor is usually in a drawdown state.

Historical evidence

Risk is a constant and the analysis of drawdowns across the main indices over long timespans provides a tangible representation of this inherent exposure. Unsurprisingly, when analysing drawdown data from the FTSE All-Share Index (FTSE) and the S&P 500 the same overarching conclusion materialises. Losses are constant and frequent, and can occur under any economic conditions and cycles.


UK stock market drawdowns for the period from 1969 to 2017 show regular and significant peak-trough declines across all decades.3

When utilising two data sets, the ‘extreme’ and the ‘natural’ state, is it only then possible to appreciate the importance of drawdowns and its potential impact on the investor both financially and psychologically. As such, Table 1 quantifies the most severe crashes during the period under review, whilst Table 2 quantifies the drawdown state, being the consequence of recurrent stock market corrections.

Table 1: Maximum Drawdowns

Stock Market CrashYearMDD
Oil Crisis 1973-74-73%
Black Monday1987-34%
Russian Default LTCM1998-24%
Dot-Com Bubble2004-49%
Global Financial Crisis2007-09-47%

Source: “The psychology of drawdowns” (2017). The Harriman Stock Market Almanac

Table 2: Drawdown State

Time Spent
0% - 5%
5% - 10%
10% - 20%
Greater than 20%

Source: “The psychology of drawdowns” (2017). The Harriman Stock Market Almanac

The two tables, especially when viewed in tandem, highlights the two main challenges the investor has to overcome when considering drawdowns (i) the inevitability of material crashes on a cyclical basis and (ii) the drawdown state is time abundant with declines greater than one-fifth of the peak prevailing for 27% of the time.

S&P 500

US stock market drawdowns for the period from 1927 to 2016 also show regular and significant peak-trough declines across all decades.4

By far, the most extreme MDD occurred in the US during the Great Depression, which stemmed from the Wall Street Crash. Similarly, to the FTSE analysis Table 3 quantifies the most severe crashes during the research period, whilst Table 4 quantifies the drawdown state.

Table 3: Maximum Drawdowns

Stock Market Crash
Wall Street Crash
Oil Crisis
Black Monday
Dot-Com Bubble
Global Financial Crisis

Source: Carlson, B (2018). “180 Years of Stock Market Drawdowns”. A Wealth of Common Sense

Table 4: Drawdown State

Time Spent
5% - 10%
10% - 20%
Greater than 20%

Source: Chandra, T (2016). “Living In A Drawdown State – 60% Of The Time”. Seeking Alpha

Similarly, as with the FTSE, the two tables highlight the same challenges to the investors with remarkably familiar MDDs when comparing the same crashes. Notwithstanding, the drawdown state from 5% upwards is 63% of the time for the FTSE compared with 49% for the S&P 500; the two indices both have in common the drawdown state is the most likely scenario at any point in time. So much so, Robert Frey concluded the time spent underwater from the last high watermark to be nearly 66% when interrogating the S&P 500 across this period, leading him to call it the “State of Regret”.5 As mentioned previously, the psychological impact on the investor is relentless, hence, Frey’s rather unceremonious drubbing of the condition on the investor.


By analysing two of the key global indices over long periods, it is clear that drawdowns are the less palatable facet of stock market investing, but an inevitable trait. Investors must therefore accept, and by default appreciate, that it is through these corrections inefficiencies materialise and in turn create opportunities. If we were to extend this analysis to other global indices, one could be confident of the outcome replicating again. Furthermore, whilst accepting of the common view that emerging market stocks are priced more inefficiently when compared with those in the more developed markets of the US and UK and consequently providing a heightened potential for better opportunities, the question remains - is it at the price of greater drawdown exposure?

At a granular level, we can see a similar pattern and even the world’s largest market cap companies are not immune. By taking for example, Apple Inc. and Inc. both with current market caps of circa USD800BN and traded on NASDAQ. Since Apple’s IPO in 1980 there has been two separate 82% drawdowns, one from 1991 to 1997 and another from 2000 to 2003. Amazon’s IPO was in 1997 and only two years later in September 2001 the company suffered a 94% drawdown. The same can be said for Microsoft Inc. and Alphabet Inc. (Google is a subsidiary) who have experienced MDDs of 70% and 65% respectively during their history. Lastly, as well as these severe crashes, which are distinguishable with the markets, these companies have also experienced peak-trough declines across all decades.6

In summary, drawdowns are very influential and can pose a significant threat to the positive investor journey. Stock market drawdowns cannot be eradicated, but can be managed, and therefore one is reminded of the need to protect the resilience of an investment portfolio, if nothing more to successfully navigate through the crashes and the ongoing drawdowns described above. By recognising the need for stability and sustainability during portfolio construction, investments with no or low correlation to capital markets and a high degree of capital preservation will play a vital role to counteract drawdowns and suppress Frey’s so-called, State of Regret.


1“The Formula: Maximum drawdown” (2018). ( Robeco. Retrieved 14 February 2019.
2“Maximum Drawdown (MDD)” (updated 2017). ( Investopedia. Retrieved 14 February 2019.
3“The psychology of drawdowns” (2017). ( The Harriman Stock Market Almanac. Retrieved 14 February 2019.
4Carlson, B (2018). “180 Years of Stock Market Drawdowns”. ( A Wealth of Common Sense. Retrieved 14 February 2019.
5Chandra, T (2016). “Living In A Drawdown State – 60% Of The Time”. ( Seeking Alpha. Retrieved 16 April 2019.
6Bilello, C (2016). “Big Winners and Big Drawdowns”. ( Pension Partners. Retrieved 16 April 2019.


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Caldwell, K (2016). “30 years of bear markets – history tells us what’s next”. ( The Telegraph. Retrieved 17 February 2019.
Costa, M; Jehan, D; Evans, C and Siddique, A (2018). “The complete downside protection toolkit”. ( Fidelity International. Retrieved 22 February 2019.
Desjardins, J (2018). “Visualizing the Longest Bull Markets of the Modern Era”. ( Visual Capitalist. Retrieved 13 February 2019.
Hargis, K; Suzuki, S and Marx, C.W (2016). “The Upside of Less Downside”. ( AllianceBernstein. Retrieved 22 February 2019.
Israelov, R; Nielsen, L. N and Villalon, D (2017). “Embracing Downside Risk”. ( AQR Capital Management, The Journal of Alternative Investments, Winter 2017, Volume 19, Issue 3, pp. 59-67. Retrieved 22 February 2019.
Lawrie, E (2017). “Could the FTSE 100 fall 40%? Biggest bull run in history reminds investors of big stock market corrections like the dotcom crash”. ( This is Money. Retrieved 17 February 2019.
“List of stock market crashes and bear markets” (updated 2019). ( Wikipedia. Retrieved 16 April 2019.
Milligan, B (2015). “The falling FTSE: How worried should we be?”. ( BBC News. Retrieved 17 February 2019.
Sraders, A (2018). “The Longest Bull Market: History and Facts in 2018”. ( TheStreet. Retrieved 5 March 2019.
“Stock market crash” (updated 2019). ( Wikipedia. Retrieved 16 April 2019.
Valetkevitch, C (2013). “Key dates and milestones in the S&P 500’s history”. ( Reuters. Retrieved 17 February 2019.

Past performance is not a reliable indicator of future results. The value of an investment and the income from it can fall as well as rise. Investors may not get back the value of their original investment. Any reference to a guarantee or guaranteed return relates to the underlying policies and not to the share price.

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