"80% of the people who hit their goals concentrate on their goals, not on their investments." "It tells you about history, it doesn't tell you about the future - nobody knows the future," says Jill Schlesinger, CBS business analyst and host of Jill on Money. However, using the 80/20 rule to try and hand-pick stocks that will potentially yield 80% of your returns is ill-advised. The 80/20 rule can be effectively used to guard against risk when individuals put 80% of their money into safer investments, like savings bonds and CDs, and the remaining 20% into riskier growth stocks. Though its applications can be widely observed, investment professionals advise against trying to apply the 80/20 rule when building a portfolio. Since then, the concept has been applied to business strategies, software development, healthcare, and more. He went on to apply the concept on a much broader scale, noting that 20% of Italy's population owned 80% of its wealth. The 80/20 rule first originated when Pareto observed that 20% of the pea pods in his garden yielded 80% of its peas. But because of the stock market's unpredictable nature, this rule is often seen as an effective way to evaluate past investments instead of guide future ones. The opposite can also be true, with 80% of investment losses tracing back to 20% of holdings. In investing: It's been found that 20% of a portfolio's holdings often lead to 80% of its growth.It directs individuals to put 20% of their monthly income into savings, whether that's a traditional savings account or a brokerage or retirement account, to ensure that there's enough set aside in the event of financial difficulty, and use the remaining 80% as expendable income. In personal finance: The 80/20 rule is often used to guide budgeting.In the business setting: This principle has been used to evaluate and improve management (when 20% of employees produce 80% of results), sales strategies (20% of customers bring in 80% sales) and operations (80% of product defects come from 20% of production problems).The 80/20 rule can help individuals either identify and target problem areas and refine current strategies, or understand where a process or input is doing especially well and work to replicate it elsewhere. It's often used to identify the most efficient way of doing things and focus on developing them to maximize productivity. To put it in simpler terms, it means the majority of results come from a minority of causes. Referred to as the Pareto Principle after Italian economist Vilfredo Pareto, the 80/20 rule finds that 80% of the outcomes or results in a given situation stem from only 20% of what went into it.
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