When it comes to investing, we all want to earn the highest return possible. There are many strategies out there to help with this endeavor. Some investors use charting tools, while others go by a fundamental analysis of the markets. But I’ve found the best route for the highest returns is to simply follow the 80-20 rule.

You might think when seeing the 80-20 rule that I am talking about putting 80% of your money into equities and the other 20% into fixed income holdings. But you would be wrong. The 80-20 rule has nothing to do with your overall allocation. It goes much deeper than that.

So let’s get started so you can start achieving the highest returns possible.

What Is The 80-20 Rule?

The 80-20 rule was developed by Vilfredo Pareto, an Italian economist. You might be familiar with the 80-20 rule as the Pareto Principle. Pareto came up with this idea when he was working in his garden. He noticed that 20% of the pea pods he planted accounted for 80% of the peas he harvested.

He then took this idea one step further and showed how 80% of Italy’s wealth was held by just 20% of its population.

Fast forward to the 1940’s and Joseph Juran applied this idea to business. He showed that during the manufacturing process, 80% of the problems in quality control resulted from 20% of the defects. Therefore, if a business focused on correcting 20% of the defects, they would see a large spike in better quality items.

The 80-20 rule has since expanded into many other areas of life. Here is a brief breakdown:

One important point about the Pareto Principle is that it is not hard and fast. What I mean by this is that it won’t always be that 20% of customers make up 80% of a company’s profits. It could be 25% of customers make up 90% of profits. So don’t get set on 80-20. The point is the idea that the majority of results comes from a small set of activity.