Separate the rough ride from the deepest fall
Volatility measures how widely returns fluctuated, including upward moves. Sharpe relates return above a risk-free reference to that variability. Maximum drawdown measures the deepest observed peak-to-trough fall. A stronger Sharpe ratio does not guarantee a smaller loss along the way.
Compare all three over matching dates. An average cannot tell you how a particular downturn felt, and a historical maximum is not a limit on future losses.
Read the trade-off, not just the ratio
A stronger Sharpe ratio, but a deeper fall
- Everyday Growth · Max drawdown
- -34.1%
- S&P 500 · Max drawdown
- -24.5%
Everyday Growth recorded a Sharpe ratio of 0.86, compared with 0.57 for S&P 500. Its largest recorded fall was 34.1%, compared with 24.5%.
Interpretation: The stronger return efficiency did not make the worst downturn easier. Judging only the ratio would miss the deeper fall experienced by this allocation.
Check your own portfolio
Correlations add a different question: could several important holdings move together? Read each relationship alongside its allocation weight. Correlation with the benchmark describes market tracking; it does not establish that the holdings are independent.
- Read Sharpe with its return and volatility inputs. Check whether the extra variability came with proportionately stronger historical return.
- Inspect the deepest fall, its dates and any recorded recovery. A recovery outside the observed window remains unknown.
- Examine the largest closely linked positions. Spreading exposure may change both the downside and upside; these measures do not determine your personal capacity for loss.