Endurance, Compounding & the Bear Market

When stocks fall by -20% from their highs, it’s called a “bear market.” The S&P 500 fell from a high of around 2925 in October to a low around 2351 on Christmas Eve. Most of us were calling the -19.6% decline a bear market, even if it hadn’t officially fallen 20% (yet). If you’re a stickler for the rules, then you only have to look at the tech-heavy Nasdaq for an official bear market -- from August 30 to December 24 it fell -23.9%.This is very sobering for investors, and like many of you, I found the topic dominating my holiday conversations. But I also found a little time to put work out of my mind by picking up a great book.“Endurance” is the true story of Sir Ernest Shackleton, who sailed for Antarctica in 1915 on a mission to become the first person to cross the then-unexplored continent. But before he reached land, his ship became stuck in an ice floe, and so began an extraordinary story of survival and perseverance. For 10 months, Shackleton and his 27-man crew fought to stay alive and make it back home.After getting stuck, the boat was eventually crushed to pieces by the huge grinding ice floes. Without shelter and unable to safely cross the floes by boat, sled or foot, the men had to make camp on the ice and wait for the winds and ocean currents to slowly move them north. As the months went by, boredom set in as they sat with nothing to do, waiting for the wind to blow them toward dry land.The boredom was punctuated by moments of acute, paralyzing fear. Sea leopards 10 feet long would stalk men walking on the ice. Ice floes would crack open and dump men and supplies into the freezing water. The crew tried to escape on life rafts, but savage storms battered the tiny boats out on the open sea for days on end. Battling starvation and sleep-deprivation, most of them reached the point where they just wanted the agony to be over, one way or another.In the stock market, that feeling of just wanting the agony to be over is called “capitulation.”Capitulation convinces you to sell when prices are low, even if selling low means locking in losses. Capitulation is a financial plan’s most destructive enemy, and it’s the one I try to avoid at all costs.Bear markets can last months or years. They can cause emotional, mental and even physical anguish. During bear markets it’s easy to forget why we are investing in stocks in the first place.So what is our “why”?Compounding. Compounding is how investments grow over time. The longer you stay invested, the better your chances of seeing big gains in your portfolio.The power of compounding is difficult to understand when times are good, and it’s nearly impossible to remember when times are bad. But having the patience and resolve to endure bear markets is the only way to consistently reap the benefits of compounding.Visualizing the power of compounding for my clients is probably my most important job. It helps me stick to the plan and avoid capitulation when the markets tumble. It allows me to look forward 10 years and envision the possibility that a portfolio has doubled in size. I envision the freedom and peace of mind the client might have then because of the decisions we make today.To survive this bear market and all the others to follow, the first thing you’ll need is a good long-term plan that allows you to harness the power of compounding for your portfolio. Once you’ve got that, you’ll just need the patience and endurance to let it work.By the way, Shackleton and his men survived. Every single one.* * *And if you’ve never seen a sea leopard, I encourage you to watch this short video of biologist Lisa Kelly and her new friend. I can almost guarantee it will make your day.