Pareto's Principle: The 80/20 Rule

Don't skip this section!

If you only learn one thing from this blog, it should be this.


In colloquial terms, Pareto's Principle is the 80/20 rule. This basically states that the 20% of the key results or attributes come from 80% of the inputs. These figures don't necessarily work out to exactly 80% and 20% in reality but you get the idea. Here are a few examples:


80% of the country's wealth is possessed by 20% of its residents.
80% of all the online content is generated by 20% of its users.
80% of the gym's equipment and resources are used by 20% of its members.
80% of the customers contribute to 20% of the business profits.
80% of the value you add in your job are realized through 20% of the time and effort you put in.
20% of your clothes are worn 80% of the time.


In this blog, we will apply the 80/20 rule to improve the following:



Our Investments
Our Budgets
Our Lives/Time


Applying Pareto's Principle to Investing:

We will rely on index ETF funds and/or futures to provide maximum diversification among multiple asset classes without cluttering your portfolio with a long list of securities.


One word of warning: You might have a portfolio with several different individual stocks. As much as you're tempted to do so after reading this, DO NOT attempt to apply the 80/20 rule here by "cleaning up" the # of stocksand only keeping the ones that have provided the best returns recently or some other criteria. If you feel you have too many stocks, then sell them all and reinvest the proceeds into a well-diversified stock index fund (more on that later.)


Unfortunately, investing in individual stocks is a complex and risky process and it's very difficult, if at all, to accurately predict which stocks will perform well in the future even if they've made impressive gains recently.


Applying Pareto's Principle to Budgeting:


We will focus on cutting back on the big ticket items in your budget if possible and the items that have the most minimal impact on your standard of living relative to their price. This frees up more money to pay off debt and invest for the future.


For further exploration:

Please read the section on Pareto's Principle in Tim Ferriss's book The 4 Hour Work Week.


You can either buy and download it online


Or get it at your local public library


He explains it in greater depth and it was one of my main inspirations for writing this blog.

If you're unable to read his book, at least read the Wikipedia article on the subject