Two Portfolios Can Share the Same Max Drawdown and Feel Completely Different to Actually Hold. The Ulcer Index Is Why
6 min read
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6 min read
The IHSG fell 61% in 2008 and took about 17 months from the bottom to climb back to its old peak. It fell 38% in 2020 and took about 9.5 months to get back to its pre-pandemic level (Kompas, Kompas). A smaller fall recovered in roughly half the time. Depth alone never tells you how long you actually have to sit underwater. The Ulcer Index is the number built to catch both parts at once.
Max drawdown only records one thing: the single worst fall from a peak to the lowest point after it. It says nothing about how long a portfolio stayed down there before climbing back out. Two portfolios can post the exact same max drawdown, one snapping back in weeks and the other grinding sideways underwater for a year, and max drawdown alone cannot tell them apart.
The Ulcer Index can. At every point in a period, it measures how far the portfolio sits below its highest value so far, squares that percentage, then averages all those squared numbers across the whole period and takes the square root.
Ulcer Index = √( average of (percentage drawdown at each point)² )
Squaring does two things at once. It punishes a deep drawdown far more than a shallow one, a 20% fall contributes sixteen times more than a 5% fall, not just four times more, because it is being squared before it is averaged. And because a portfolio's drawdown percentage stays non-zero at every point it remains below its old high, a slow, grinding recovery keeps feeding non-zero numbers into that average for months, while a fast recovery only contributes a handful of them. Depth and duration both show up in the same single number.
Peter Martin devised the Ulcer Index in 1987 and published it with Byron McCann in their 1989 book The Investor's Guide to Fidelity Funds. It was built with mutual fund investors in mind, people who cared less about a fund's raw volatility in both directions and more about the specific, prolonged stomach-ache of watching an account sit below its old high for months on end. That is also where the name comes from: it is the stress of a slow-grinding drawdown, not a sharp one-day dip, that the index's creators associated with the kind of stress that gives people ulcers.
Max drawdown only records the single worst point. The Calmar ratio divides annualized return by that same single worst point, which catches how much return you earned for your deepest fall, but still says nothing about how long you had to hold through it. Both numbers can be identical for two portfolios that were completely different experiences to actually sit through.
Picture two hypothetical portfolios that both hit an identical -20% max drawdown at some point during the year. Neither ever fell further than that. Here is where they differ.
Portfolio A drops 20% in month one, climbs back to -10% by month two, and is at a brand new high by month three. It spends the rest of the year, nine more months, sitting at or above that high.
Portfolio B also drops 20% in month one, but never fully recovers. It spends all twelve months below its old peak, drifting between -20% and -5% the whole way, closing the year still 5% underwater.
| Portfolio A | Portfolio B | |
|---|---|---|
| Max drawdown | -20% | -20% |
| Months spent below the old peak | 2 of 12 | 12 of 12 |
| Year-end position | New high | Still -5% underwater |
| Ulcer Index | 6.45 | 14.59 |
Same max drawdown, more than double the Ulcer Index. A Calmar ratio built from either portfolio's annualized return would divide by the same -20% for both, producing scores that look equally risky on that basis alone. The Ulcer Index is the only one of the three that reflects what actually happened afterward: Portfolio A's dip and Portfolio B's year-long slog were not the same investment to hold, even though their single worst moment matched exactly.
The Ulcer Index has no fixed universal cutoff, since it depends on the asset class and the period measured, but the comparison between two portfolios or funds over the same period is what makes it useful. A lower Ulcer Index over the same stretch of time means less combined depth and duration of pain, whether that came from a shallower fall, a faster recovery, or both. It is always used as a relative measure, one portfolio or fund against another, rather than read as a pass or fail number on its own.
A single volatile stock will typically carry a much higher Ulcer Index than a diversified index, and a fund that recovers quickly from every dip will carry a lower one than a fund of similar depth that grinds. Comparing an equity fund's Ulcer Index against a bond fund's is rarely meaningful since the two asset classes are not built to fall the same way in the first place.
The Ulcer Index needs your portfolio's value at regular points across a period, each measured against its own running peak up to that point, which is more than a single before-and-after snapshot can give you. NetWort's Portfolio Health card already tracks your max drawdown in real time from your actual transaction history, but it does not currently combine that history into an Ulcer Index figure for you.
What you can do today is compare the shape of the drawdown, not just its depth, across the assets you are weighing. NetWort's Explore Assets screener lists each asset's Worst-Case Loss and Bumpiness side by side, so you can see at a glance whether an asset with a smaller worst-case fall is also the calmer one to actually hold, or whether it just fell less deep while staying underwater just as long. Two assets can share a similar worst-case number and still be very different investments to sit through, the same gap this whole article is about. If you want the broader picture behind those numbers first, NetWort's market page tracks IDX, US and crypto sentiment and volatility together, so you can see whether today's moves look like a fast dip or the start of a longer grind before you check individual assets.