The 80-20 Rule of Investing

The 80-20 Rule of Investing

I think the readers must have heard of the Pareto Principle,which is also known as the 80/20 Rule. This principle states that 80 percent of your results will come from 20 percent of your efforts. And this applies to investment in stocks also.

Whenever I ask any investor about how he started off investing. He would normally reply. I have invested 5 Lakhs in Fixed Deposits. Another one says, he has invested 5 lakhs in Mutual funds. In recent times, because the markets were not volatile, people tend to forget about assest allocation of funds.

Assest Allocation of funds means percentage of your assests in Equity, Debt & other assest classes like Gold, Fixed Deposits. If we talk about the risk & return matrix, Mutual funds which invest in equities had given 18% returns in the past whereas Fixed Deposits give 8-9% return. Equity markets are volatile & risk, and there is no guaranteed returns. In Debt funds, you may get guaranteed 8-9% returns. So what should be the assest allocation for any investor. I would say as a rule of investor. Invest in Mutual funds 100 minus your age. It means if your age is 35, you should invest 100 minus 35, 65% of your total investment in mutual funds & remaining in debt funds.

Similarly for a investor above 50, he should invest 50% of his investments in equities, remaining in debt.

The conclusion should be , one must be active while investing & must use assest allocation tool to plan his/her investments or hire a wealth manager. This would help him in getting returns in line with his expectations. SIP in Mutual Funds is the best route for retail investors to put their money in stocks indirectly & leave the decision of which stocks to buy in the hands of fund manager

This article is written by Mr. Mayank Gupta, financial planner, who is into Portfolio Advisory & wealth management