What is a 'Peak-to-Valley Drawdown'

A peak-to-valley drawdown is a fund's or money manager's largest cumulative percentage decline in portfolio value. It is defined as the percentage decline from the fund's highest value (peak) to the lowest value (trough) after the peak. Funds that have been in existence for long periods of time may have a number of peak-to-valley drawdowns over various time periods.

BREAKING DOWN 'Peak-to-Valley Drawdown'

Peak-to-valley drawdown can help an investor to gauge the risk of a portfolio. It is a performance and risk-reporting measure that some funds may use. It is often more commonly found reported with characteristics of higher risk portfolios, such as hedge funds and managed futures strategies.

Investors can also follow peak-to-valley drawdowns with long-term historical return data. Creating an individual peak-to-valley drawdown report may be necessary for this type of analysis since it is not often provided automatically by investment managers. When analyzing or creating your own peak-to-valley analysis there are a number of measures associated with peak-to-value drawdowns that can provide greater insight about a fund.

Drawdown Reporting and Calculations

A drawdown report can show the peak-to-valley losses of a portfolio for a single month or a cumulative time period consisting of several consecutive months. Some of the important factors in a peak-to-valley drawdown report’s calculations include the following:

Depth: This is a measure of the percentage loss from peak to valley.

Length: This shows investors the length of time associated with the loss. The length of time associated with peak-to-valley drawdowns can help an investor better understand the volatility of the portfolio.

Recovery: Recovery can be an important factor followed closely by many investors. It shows the amount of time from the portfolio's valley to a new high.

Average recovery time: The average recovery time is useful for understanding a portfolio’s peak-to-valley drawdowns comprehensively. The average recovery time is a measure of recovery time averaged from all of a portfolio’s peak-to-valley drawdowns historically since its inception.

Peak-to-Valley Considerations

Declines in a portfolio’s asset value are inevitable, however, the magnitude of peak-to-valley losses and their occurrences over time can be important considerations for investing in a fund. While losses will occur, investors prefer lower loss magnitudes and low average recovery times that do not rely on riskier bets for improving performance.

In some cases annual fees may also be a contributor to peak-to-valley drawdowns. Fees are a regular expense that investors usually pay indirectly, which affects the fund’s value. If fees are paid during down-trending performance, this can increase the losses an investor sees in asset value.

  1. Maximum Drawdown (MDD)

    A maximum drawdown (MDD) is the maximum loss from a peak to a ...
  2. Portfolio Return

    Portfolio return is the gain or loss achieved by a portfolio. ...
  3. ETF Futures and Options

    ETF Futures and Options are derivative products built on existing ...
  4. Active Index Fund

    Active index funds track an index fund with an additional layer ...
  5. Cumulative Return

    Cumulative return involves the total change in price of an investment ...
  6. 2% Rule

    The 2% rule is a money management strategy where an investor ...
Related Articles
  1. Investing

    How the "Buy the Dip" Mentality in the Stock Market May Fade

    Consider portfolio changes for a sustained stock market drawdown, with the S&P 500 near its record high, stock valuations stretched and economic growth slowing.
  2. Investing

    Don't Let Valuations Drive Your Investing Decisions

    Base your investment decisions on data, processes and risk rather than on valuations.
  3. Investing

    3 Benefits of Looking at Asset Classes Beyond Your Portfolio

    Discover three of the primary advantages for investors that can be obtained by diversifying their investment portfolio with different asset classes.
  4. Investing

    3 Long-Term Investing Strategies With Strong Track Records

    Learn why discipline and a statistically valid investment strategy can help an investor limit losses and beat the market over the long term.
  5. Retirement

    How Americans Struggle with Retirement

    While some struggle to plan a drawdown schedule, others may not be able to afford retirement at all.
  6. Personal Finance

    Key Questions to Ask When Selecting an Advisor

    Hiring the right financial advisor is possible if you ask these key questions.
  7. Investing

    Fidelity Spartan 500 Index Fund Performance Case Study (FUSEX)

    Explore the performance of the Fidelity Spartan 500 Index Fund since 2012 and discover the months when the fund is most likely to increase or decrease in value.
  8. Tech

    What Does an Ideal Retirement Portfolio Look Like?

    The "ideal" retirement portfolio can differ from one investor to another, but some themes hold true no matter what.
  9. Investing

    The Workings of Equity Portfolio Management

    Portfolio management is a necessity, not an afterthought, in achieving analytical efficiency.
  1. Have hedge funds eroded market opportunities?

    Learn why there is still plenty of opportunity for investors even though hedge funds have grown substantially. Read about ... Read Answer >>
Trading Center