Principle of 80:20 is my favorite allocation for portfolio allocation
Background
The most common and first question comes to the mind of every person on the day he starts earning is where to invest savings and how should he invest so that he can reap maximum benefits out of the amount deployed by them. I belong from a Marvari Baniya Community and a Chartered Accountant by the profession, hence, I was fortunate enough to realize the importance of savings in early stage of my life.
I started savings at early stage of my life but I used to be in dilemma and unsatisfied with the returns of my investments because of lack of personal finance education, Yes, I do accept, I had lack of personal finance knowledge even after being a Chartered Accountant.
I started reading books on personal finances and met with various portfolio managers and leading bankers regarding various investment proposals and sooner I realized, wealth creation can be done in the better manner and I started reallocating my investments and this approach paid me better than my earlier investment approach.
Principle of 80:20
The Italian-born economist Vilfredo Pareto (1848-1923), who observed that a relative few people held the majority of the wealth (20%)
– back in 1895. Richard Koch in his epic book “The 80 20 Principle” had beautifully explained the legendary concept of 80 20 very dynamically in simple words with the help of numerous examples of the legendary people who taught the world a new path to live the life.
When I completed the astonishing book, I started thinking, can it be applied to my portfolio and the answer was affirmative, I started the journey with the new principle.
This principle shall be followed in true spirit by investors while making/evaluating their investments/ return on investments to get maximum benefits out of it. An investor shall always keep 80% of their investments in Equities only and 20% of their investments shall be deployed in fixed income assets.
People may say 80% amount in equities is too high and it shall vary with the risk appetite of the investor.
To this I would say in the words of Prateek Gandi in classic web series SCAM 1992 “Market me sabse bada risk to risk na lene mein hai”. Return on any fixed return asset class is always lower than the sum of the Growth rate of the nation and prevailing inflation rate in the nation, hence, if a person wants to attain the financial freedom then he has to beat the addition of the real GDP growth and Inflation rate simultaneously otherwise he will be poorer after a year or over the period of time. To avoid this a person will either continue to save more or will work more to save more money, and he will end up his life while working for money only which is not an idle way of living the life.
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