### By Simon Bottle, Jun 17 2014 09:02AM

Rule 1 - genuine diversification in the form of asset allocation that gives the best chance to deliver attractive average annual returns, whatever the markets are doing, is rule number 1.

Rule 2 flows from rule 1 – the best way to make money is not to lose it in the first place. Do not shoot for greedy returns. If you can make 20% in a portfolio in a year you can lose 50%. And if you lose 50% you have to make 100% to get back to where you started. Protect capital first, manage risk and the returns will take care of themselves.

Rule 3 flows from rule 2 – the magic of compounding returns is the most powerful wealth generator there is. If you make 7% per year and re-invest then after 6 years your portfolio is 50% larger and in 10 years it has been doubled.

Many people don’t realise that compounding works both ways. The greater the losses a portfolio loses, the greater the gains needed in order to get back to the breakeven point. A real return approach seeks to generate growth but with lower volatility, and let the power of compounding work positively.