#65 What is the maximum amount I can lose if I invest in stocks?

If you want to invest successfully over the long term, you should consider not only opportunities but also risks. This article shows you what losses have been possible historically, how you can put them into perspective – and what really matters in practice.

What does «maximum loss» actually mean?

If you invest in a globally diversified equity portfolio – spread broadly across different countries and sectors – you should be aware of and distinguish between the following three types of losses:

1. Short-term losses (daily losses)

A striking example is what is known as Black Monday in 1987: The U.S. stock market lost over 20 percent in a single day. Such events are rare, but they illustrate just how volatile markets can be in the short term.

2. Maximum declines (drawdowns)

Far more relevant is the so-called drawdown: the maximum decline from the peak to the trough during a crisis. This phase is particularly challenging for many investors, as the paper losses in the portfolio feel tangible and permanent.

3. Permanent losses

Ultimately, what matters is whether you realize these losses through sales. This results in a permanent loss: invested capital that you will never recover. This is precisely where the difference lies between temporary market fluctuations and actual loss of wealth.

What history teaches us about the stock market

A look at the major crises of the past 100 years helps put the risk into perspective – especially on an inflation-adjusted basis.

• The Great Depression (starting in 1929): The U.S. stock market lost about 80 percent of its value in real terms. Full recovery took over 25 years.
• Dot-com bubble (starting in 2000): A globally diversified portfolio lost about 50 percent. The recovery took around six years.
• Financial crisis (2008): Also a decline of around 50 percent, with a recovery phase of about four years.
• Covid crisis (2020): A slump of around 30 percent, followed by an exceptionally rapid recovery within a few months.

These examples clearly show: Even broadly diversified stock portfolios can temporarily lose around 50 percent of their value. A fortune of one million francs can temporarily shrink to 500'000 francs – visibly and tangibly.

Why the question of the «maximum» can be misleading

Strictly speaking, there is no absolute upper limit on losses. Theoretically, a total loss would also be conceivable – for example, in the event of a global economic collapse. However, such a scenario is considered extremely unlikely.

The crucial questions are therefore: What is realistic? And can you handle it?

Historical data shows a clear pattern: Since 1970, there has been no rolling 16-year period in which a globally diversified equity portfolio has posted a negative real return.

This means: Even if your portfolio may lose significant value in the short term, long-term losses have not been observed historically when the investment horizon is sufficiently long.

The biggest risk: your own behavior

An often underestimated but crucial factor is your behavior as an investor. Most lasting losses do not result from market crashes themselves, but from poor decisions made during difficult periods. Those who sell out of fear during a crisis realize losses and often miss out on the subsequent recovery.

It is not the crisis that destroys wealth. It is ill-considered panic selling during the crisis. The crucial question is therefore: How much paper loss can you withstand without abandoning your long-term strategy? In calm times, the answer is easy, but its true significance only becomes apparent during turbulent market phases.

What can specifically help you

There are three key levers for better managing the risks of stock investments:

1. Choose the right equity allocation

Adjust your equity allocation to your personal risk tolerance. If a potential loss of 50 percent is difficult for you to bear, a lower equity allocation may make sense. A portfolio with 50 percent in stocks may lose around 25 percent during a severe crisis – that is still significant, but manageable.

2. Consider your investment horizon

Stocks are primarily suited for long-term investments. If you need your capital within a few years, you should not be fully invested in stocks. Otherwise, short-term market fluctuations can become a problem.

3. Avoid emotional mistakes

A structured investment strategy, ideally supported by professional asset management, can help prevent impulsive decisions such as panic selling. The greatest value often lies not in «timing the market» but in the discipline to stay invested.

Conclusion

If you invest entirely in stocks, you must expect that your assets could halve in value at some point. This reality is unpleasant but well-documented historically. At the same time, history also shows that markets have always recovered – provided investors have remained invested.

The decisive factor is therefore not just market risk, but how you handle it. Or to put it another way: The maximum loss isn’t caused solely by the market – but by decisions made at the wrong moment.

Have you ever experienced a major downturn in your portfolio – and how did you react? Did you hold on? Buy more? Or did you sell after all? Send me an email about your experiences.