Investor Wojtek: How much can I lose on shares?

For as long as I've been an active investor, stock markets have been booming. Stock market indices are climbing almost everywhere around the world, and in some cases quite rapidly. In Poland, for example, the WIG is setting historic records, and by early August it was already 34% higher than at the beginning of the year. The WIG20 reached 3,000 points after 17 years. Moreover, Polish stocks – in dollar terms – are the best stock market investment of 2025 so far. It's no surprise, then, that my portfolio is also growing. Since New Year's Eve, it's increased by 13,000 złoty, or 26%.

Okay, but even a novice investor like me knows that bull markets don't last forever. And even during them, sharp corrections can occur. Take the one in April, when, following US President Donald Trump's announcement of new tariffs, the WIG index suffered a 15% slide. This wasn't pleasant for my portfolio (its value fell by almost two thousand złoty) or my psyche.

I decided to examine how this market has performed in the past. That is, not only how much can be gained in the medium and long term, but also how much can be lost along the way. As I mentioned, recent months have been among the best in the history of the Warsaw Stock Exchange. Even if the WIG had not risen by the end of the year, it would still have recorded the eighth-best year in its 34-year history. And a result significantly above the average of nearly 9% over the last 30 years.

But now I'm interested in the other side of the stock market coin. I've examined over 34 years of WSE history and reached several conclusions. First (and quite obviously), there hasn't been a year in which the WIG index didn't experience at least a few percent decline. Therefore, there's no risk-free profit. However, in 16 out of 35 cases (including the still-unfinished year 2025), the declines didn't exceed 20 percent. It's no coincidence that Americans call a decline of more than 20 percent from the peak a bear market. Because anything below -20 percent is considered a simple pullback or, at most, a local correction.

Secondly, in the next eight cases (i.e., 23% of the total), stock market declines were deeper, dragging the WIG down by as much as 30%. The last time something like this happened was in 2022, when the Russian attack on Ukraine intensified the post-COVID inflation shock and lowered the WIG by nearly 40%. That's a lot. It's a good thing I wasn't in the market back then, because I don't know if I could have mentally withstood it. But it's been even worse a few times! So far, the WIG has recorded four years in which the maximum drawdown exceeded 40%. The worst was in 1994, when the WIG plummeted by 67.6% after its maiden bull run in 1992-93. The second such disastrous year was the infamous 2008 (-57%), which saw the escalation of the global financial crisis. It fell by over 40%. it was still there in 1998 (Russian crisis) and in 2020 (Covid lockdowns).

Third, although stock markets generally rise over the long term, there are periods when they fall significantly—as much as 50 or 60 percent. Such a bad year, however, occurs no more than once every dozen or so years. On average, the WIG can drop by as much as 40 percent every ten years, and statistically, a bear market of 30-40 percent occurs every five years. For me, that's a lot, and my portfolio hasn't faced such a test yet. But knowing history, I'm convinced that such a test will come sooner or later. And then I have to be prepared.

Since I'll definitely be venturing beyond the WSE in the future (for now, I've done it with one foot in my pocket – I bought an ETF on the S&P 500, the main index of the American stock market listed on the WSE), I decided to check out what's happening on the other side of the pond, where stock markets have a much longer tradition than in Poland. I found the relevant data on Charlie Bilello's blog . It turns out that while the average annual return on the S&P 500 has been 12% since 1980, the average maximum drawdown of this index during a given year has reached 14%. "No risk, no reward," Charlie concluded.

And he's probably right. After all, finance textbooks often say that the rate of return on the stock market includes the risk-free rate and a premium for the risk taken by investors. After all, if there were no risk, no one would be earning those few percentage points above inflation. And if there weren't that premium, no one would take on additional risk. Logically.

In any case, it turned out that Wall Street has also experienced quite significant declines in the past. However, it's also clear that the mature American stock market is less risky than a relatively young emerging market like the Warsaw Stock Exchange. Over the previous 46 years, the S&P 500 hasn't experienced drawdowns of more than 10% in a whopping 20 years. That's almost half the time. The next 17 years saw declines of less than 20%. Only nine of the last 46 years (i.e., less than 20%) were bear markets. Of these, only four times did the S&P 500 lose more than 30%. This happened in 1987 (-34% during the infamous Black Monday), in 2002 (-34%), and of course in 2008 (-49%) and in 2020 (-34%).

Interestingly, it turned out that even during very good years for stock owners, the S&P 500 could experience a 20% or even greater decline along the way. This was the case in 2009 (26% of full-year profit despite a 28% loss at the beginning of the year) and in 2020 (+18% for the year despite a -34% loss in the spring). Indeed, there's no risk-free market in the stock market.

What did all this teach me? I think three things. First, that declines—sometimes sudden and painful ones—are an inevitable part of the stock market landscape. And you just have to get used to them. Second, that you don't have to be so afraid of them, because sometimes even a sharp sell-off doesn't preclude a good year-end result. And finally, third, that it's really not that common for a stock market decline to wipe out the stock market indices by more than 30-40%. And when it does, you can buy shares almost blindly. You just need to have the spare cash.