Four Ways to Apply the 80/20 Rule to Your Financial Pursuits

Ever heard of the 80/20 rule? It suggests 80% of an outcome is often the result of just 20% of the effort you put into it.

This doesn’t always work. Sometimes, it’s worth going the extra mile. But often, by prioritizing the 20% of your efforts that makes the biggest splash, you can save time, simplify your finances and likely gain better results. In that spirit, here are four financial best practices that pack a lot of value per “pound.”

1. Investing: Be There, and Stay There

You could do far worse than to invest according to a sentiment attributed to Woody Allen:

“80% of success is showing up.”

Going back to 1926 and after adjusting for inflation, U.S. stocks have delivered about 7.3% annualized returns to investors who have simply been there, tolerating the down times to gain what the markets have to offer over the long haul. Those who instead fixate on dodging in and out of hot and cold markets are expected to reduce, rather than improve their end returns. That’s because, when markets recover from a downturn, they often more than make up for the stumble quickly, dramatically, and without warning. Instead of chasing trends, simply stay invested over time.

2. Portfolio Management: Use Asset Allocation, and Don’t Monkey with the Mix

Asset allocation is about investing in appropriate percentages of security types, or asset classes, based on their risk/return “personality” For example, given your financial goals and risk tolerance, what ratio of stocks versus bonds should you hold? What percentage of small cap value stocks versus large growth stocks make sense in your portfolio? How much domestic exposure do you need and how much international?

Both practical and academic analyses have found that asset allocation is responsible for a great deal of the return variability across and among different portfolios. So, to build an efficient portfolio, we advise paying the most attention to your overall asset allocation, rather than fussing over particular securities. In other words, focus on the right complement of stocks and bonds along with the appropriate mix of size and geography. And by the way, once you’ve got a personalized asset allocation in place, the only reason to change it is if you change. If you’re tempted to alter your allocations based on current market conditions, circle back to our first point.

3. Financial Planning: Do It, But Don’t Overdo It

Also in 80/20 rule fashion, an ounce of financial planning can alleviate pounds of doubt. It connects your resources with your values and priorities. It’s your touchstone when uncertainty eats away at your resolve. It guides how and why you’re investing to begin with.

Here’s some good, 80/20 news: Your plan need not be elaborate or time-consuming to be effective. If you have more financial complexity, we’ll definitely dive deeper with you, but you can start simple. Even a one-page plan will give you a huge head start.

It’s easy to be intimidated by the concept of a Financial Plan. And while they typically include a lot (A LOT) of detail, good plans can be summed into just a few key points. Having a written plan is that 20% effort that can bring clarity on your direction as well as peace of mind. When you waver, or feel compelled to react to life changes, market volatility or sensational headlines, you can use the plan as a touchstone to stay the course. It can provide reassurance that you most likely have already accounted for what’s scaring you and a reminder that this is a long haul.

When in doubt, read what you’ve written. Is it still “you”? If so, your work is done; stick to the plan. If not, consider what’s changed, and update your plan accordingly. It can be that easy.

4. Financial Security: Be Vigilant

Even the best-laid financial plans can be thwarted if your assets are exposed to financial scams and identity theft slams. Fortunately, there’s a lot you can do to secure what you most easily can. We’ll be posting a series that goes deep into cyber security and how to protect yourself.

In the meantime, if we were to pick one practical, but often overlooked punch that delivers among the biggest blows to identity theft (at least here in the U.S.), it’s the ability to freeze your credit reports.

Freezing each of your accounts with the three major credit bureaus (Equifax, Experian, and TransUnion) is like locking the doors to your home or vehicles. It creates a few extra steps for you, as you’ll need to temporarily lift the freeze when you wish to take out an occasional loan. But it costs nothing to set up and manage. And if an identity thief does get ahold of your information, it should stop them cold if they try taking out lines of credit in your name. This strikes us as an 80/20 trade-off well worth making. And stay tuned for our next installment that will go deep into cyber security.

Building Lifetime Wealth, 80/20 Style

Properly applied, the 80/20 rule can help minimize the time and energy you have to put into maximizing your financial well-being. Whether you’re building wealth, saving for retirement, funding your kids’ college education, preparing for a wealth transfer, applying for insurance, or otherwise managing your hard-earned wealth, we can help you identify and execute these and other actions that matter the most, so you can get back to the rest of your life. Want to learn more? Give us a call today. Consider it part of the 20% of your efforts that should take you far.