The principles of risk management and wealth building that I outline below are nothing new. I borrow liberally from the past and current financial greats who have far more knowledge and experience than I do. Nevertheless, the swings of human nature are such that very few investors/wealth managers actually implement the following principles with discipline. We are striving to be one of those few firms, and we want to encourage our clients to practice the same disciplines with us. Given the tumultuous economy at hand, the time to do so is now more than ever.

Some of the greatest financial principles come from the likes of Benjamin Graham, Warren Buffett, Richard Russell, Jim Rogers, Bill Gross, etc. Many of you have read these authors or have at least been exposed to their most popular maxims. You will probably recognize many of the rules listed below—these are timeless principles that do not change—but you may not necessarily recognize the order in which I have them listed. My hope is to encourage greater financial discipline by first regarding the rewards that await us if we practice the principles necessary to enjoy them. That being said, these rules work in tandem and are important as a whole. Each rule ultimately depends upon the others to provide a comprehensive and robust wealth building strategy.

Rule 1: Behold the power of the law of compounding.

Albert Einstein said that the law of compounding is the eighth wonder of the world (My understanding is that Einstein apparently knew a thing or two about numbers). Wealth creation and preservation is built upon a proper understanding of the final destination as well as the path to arrive there—and the law of compounding is both. The power of compounding is probably best understood when illustrated practically. I formed the following table to mimic a study produced by Market Logic and published long ago in one of Richard Russell’s Dow Theory Letters. I credit them both for making a powerful concept so easy to understand.

In the table below, I track the progress of the investment accounts of Investor A and Investor B over a 59-year period. I assume that Investor A begins investing $5,000 a year for a period of only 10 years. Investor A invests no additional money after year 10. Investor B begins investing $5,000 each year starting in year 11 and continues to invest each year thereafter for the rest of the 59-year hold period. I have assumed that the accounts of Investor A and B both receive an 8% return per year.

[Click here for the full Excel spreadsheet.]