Pareto Principle

Happy New Year or Felice Anno Nuovo*.

*given I was married in Italy, I feel I can use this!

I know a lot of you will be making resolutions and planning out 2025. I hope you all achieve what you set out to. Some of you may want to achieve more ‘balance’ either through work/life or trying to make more time for things you enjoy. If this is something you are contemplating then my only piece of advice is to ensure you don’t mistake ‘balance’ with 50:50. It is incredibly hard to get to 50:50 and quite frankly I fine it unproductive. I would rather take the advice of Vilfredo Pareto.

Pareto was a sociologist who observed in the 1900s that 80% of the land in Italy was owned by just 20% of the population.

The Pareto Principle or ‘80/20 rule’ suggests 80% of your results come from 20% of your efforts. It’s a common principle and one I’m sure you have heard of. When thinking about juggling tasks in life, work, recreation, etc. it can be a powerful tool.

In Portfolios Management, understanding the Pareto Principle is important. It’s quite often a small number of your investments (20%) can determine the majority of your return profile for your portfolio (80%), so identifying them and getting to know them is crucial.

How often when reviewing a portfolio would you look at each line or position to assess the impact, when quite often it is just a small subset that matters. This is where to spend the time.

Going back to plans for the year. It's fine to want more balance but know it's more achievable working towards the Pareto Principle.

In the words of Vilfredo Pareto, “Buona Fortuna” for the upcoming year.