Does the Pareto Principle Apply to Everything? (Even Stocks?)

Last updated on November 10, 2023

➤ What Is the Pareto Rule?

Have you heard about the 80/20 rule?

It’s not just a fancy term; it’s a handy principle that says 80% of results come from 20% of the effort.

Whether you’re in business, personal finance, or even dealing with relationship dynamics, the 80-20 rule can be your secret weapon.

What’s the 80/20 Rule?

In simple terms, the 80/20 rule, also known as the Pareto Principle, suggests that 80% of the outcomes you see come from just 20% of the causes behind them.

Imagine focusing on the 20% that matters most and reaping the rewards—it’s like finding the sweet spot for success.

How Does the Pareto Rule Work?

Let’s break it down. If you’re running a business, think about it as 80% of your profits coming from 20% of your customers. Smart, right?

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But here’s the real kicker: it’s not just about numbers. The core idea is to spot your best assets and use them wisely to get the most bang for your buck.

Is the Pareto Rule Magic?

Now, here’s where it gets interesting. Some people get caught up in thinking this is a strict law. It’s not. It’s more like a guiding principle.

The magic is in understanding that even if 20% gets the spotlight, the other 80% still matters. It’s about balance.

80-20 Rule History

Let’s take a stroll through history. Back in the 1900s, an Italian economist named Vilfredo Pareto noticed that 80% of peas in his garden came from 20% of the pods. Smart guy, right?

Fast forward to the 1940s, and Dr. Joseph Juran brought this rule to the business world. He found that tackling 20% of production problems could improve the quality of a product.

Do People Follow the 80/20 Rule?

While it might not be a strict science, many swear by the 80-20 rule.

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Salespeople, Six Sigma enthusiasts, and even Harvard grad students like Carla have found success using it. It’s like having a secret sauce for better focus and problem-solving.

Pareto Rule Example

Meet Carla, a Harvard grad working on her blog project. When her blog was lagging, she stumbled upon the 80-20 rule.

Applying it, she focused 80% on what went into creating the blog and 20% on the blog’s visitors.

The result? A 220% boost in traffic! Carla didn’t neglect the 80%, but she made her efforts count where they mattered most.

80/20 Rule in Investing

Planning your investment portfolio? Here’s how you can apply the 80-20 rule to make your money work smarter:

Consider investing in the top 20% of stocks in the S&P 500 that historically contributed a whopping 80% of the market’s returns. It’s like picking the stars that shine the brightest in the investment galaxy.

Craft an 80-20 allocation strategy. Put 80% of your investments in lower-risk index funds—your sturdy foundation.

Then, let 20% ride on growth funds, aiming for those exciting opportunities. It’s about finding the sweet spot between stability and growth.

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While past performance gives insights, it’s no crystal ball for the future. Keep a close eye on your portfolio’s performance to ensure it aligns with your goals.

Flexibility is key in the ever-changing landscape of investments.

Remember, the 80-20 rule isn’t just a number game — it’s your guide to a well-balanced and intentional investment journey.

Final Thoughts

So, what’s the big deal with the 80-20 rule? It’s about working smarter, not harder.

Identify your top performers, whether it’s clients, blog posts, or even stocks in your portfolio, and give them the attention they deserve.

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Pavlos Written by:

Hey — It’s Pavlos. Just another human sharing my thoughts on all things money. Nothing more, nothing less.