There was an article the other day published on LRC (via Dow Theory Letters) by Richard Russell.  He says this is the most popular piece he’s published in 40 years.  It is a short read and I think worth it if you haven’t seen it already.

His second rule of not losing money sounds so ridiculous, but it really is true.  This isn’t to say that you shouldn’t take some risk, but you should manage your risk and limit your losses.

The first rule is about compounding interest.  I think this is a very important lesson to teach kids.  I’m not sure what age is best as it probably varies depending on maturity.  But certainly by high school, it is a good lesson to teach.  If you look at the subject beyond an individual investor, it also explains the wealth of nations.  When a nation is grounded in freedom and property rights, the economy will flourish.  While the gains in overall wealth are hard to see over a short period of time, the growth compounds.  You will get to a point where you can save and invest more, while also consuming more.  Again, this goes for individuals or for the general wealth of a nation or area.

There is one thing in this piece that I have to take exception with.  He gives an example of the power of compounding interest and he uses an interest rate of 10%.  Now I understand that he is using a nice clean number and I’m not sure when this was originally written, but it certainly doesn’t apply to our times today.

The biggest problem is that the real rate of return right now (adjusting for inflation) is negative, particularly if you are investing in short-term bonds or money market funds.  If you take your money and stick it in a savings account right now, you are losing money.  While this idea of compounding interest is important, it’s not going to happen in today’s environment with the investments he recommends.

While this is a good educational piece, I would make sure to pair it with some writing on the Permanent Portfolio as described by Harry Browne.  His strategy is to divide up your investments into 4 equal parts.  The 4 parts are stocks, long-term government bonds, gold, and cash (or near cash equivalent).  Anyone who has used this strategy has seen nice and steady returns through the years with very few bumps.  This is a strategy that will protect you against a collapsing dollar, something that isn’t addressed in this article.