LinkedInwithBackgroundPortfolioConstructionAnAdvisor'sRoleasBehavioralCoachFinancialAdvisorPortfolioConstructionWhatIsthe80-20Rule?The80-20rule,alsoknownastheParetoPrinciple,isanaphorismwhichassertsthat80%ofoutcomes(oroutputs)resultfrom20%ofallcauses(orinputs)foranygivenevent.Inbusiness,agoalofthe80-20ruleistoidentifyinputsthatarepotentiallythemostproductiveandmakethemthepriority.Forinstance,oncemanagersidentifyfactorsthatarecriticaltotheircompany'ssuccess,theyshouldgivethosefactorsthemostfocus.Althoughthe80-20axiomisfrequentlyusedinbusinessandeconomics,youcanapplytheconcepttoanyfield—suchaswealthdistribution,personalfinance,spendinghabits,andeveninfidelityinpersonalrelationships.2:23TheParetoPrinciple(80-20Rule)KeyTakeawaysThe80-20rulemaintainsthat80%ofoutcomes(outputs)comefrom20%ofcauses(inputs).Inthe80-20rule,youprioritizethe20%offactorsthatwillproducethebestresults.Aprincipleofthe80-20ruleistoidentifyanentity'sbestassetsandusethemefficientlytocreatemaximumvalue.This"rule"isaprecept,notahard-and-fastmathematicallaw.Understandingthe80-20RuleYoumaythinkofthe80-20ruleassimplecauseandeffect:80%ofoutcomes(outputs)comefrom20%ofcauses(inputs).Theruleisoftenusedtopointoutthat80%ofacompany'srevenueisgeneratedby20%ofitscustomers.Viewedinthisway,thenitmightbeadvantageousforacompanytofocusonthe20%ofclientsthatareresponsiblefor80%ofrevenuesandmarketspecificallytothem—tohelpretainthoseclients,andacquirenewclientswithsimilarcharacteristics.CorePrincipleAtitscore,the80-20ruleisaboutidentifyinganentity'sbestassetsandusingthemefficientlytocreatemaximumvalue.Forexample,astudentshouldtrytoidentifywhichpartsofatextbookwillcreatethemostbenefitforanupcomingexamandfocusonthosefirst.Thisdoesnotimply,however,thatthestudentshouldignoretheotherpartsofthetextbook.OftenMisinterpretedThe80-20ruleisaprecept,notahard-and-fastmathematicallaw.Intherule,itisacoincidencethat80%and20%equal100%.Inputsandoutputssimplyrepresentdifferentunits,sothepercentageofinputsandoutputsdoesnotneedtoequal100%.The80-