Pareto, or the 80/20 rule

I believe most of us have heard of Pareto Principle, also known as 80/20 rule, the Principle of Least Effort, and the law of the vital few). Named after Italian economist Vilfredo Pareto, who observed in 1906 the unequal distribution of wealth in his country, that is 80 percent of Italy is owned by 20 percent of the people.

The 80/20 Rule means that in anything a few (20 percent) are vital and many (80 percent) are trivial. You can apply the 80/20 rule to almost anything from saving money to investing and to the physical world.

You observed 20 percent of the suppliers are responsible for 80 percent of  supplier related concerns. You observed that 20 percent of the items or services you bought account for 80 percent of your monthly expenditure. Also, you observed that 80 percent of your success come from 20 percent of your efforts.

Understand the Pareto principle will help you to focus your energy on those items that account for most of your monthly expenditure if you are contemplating how to increase your saving. In addition, it reminds you to focus your time and effort on those 20 percent investment that bring you 80 percent of the return.

A Pareto diagram on monthly expenditure may look as below:

Investing Risk

Investing is an exciting and action-packed idea that for a long time has make people excited about it. Even if you have little money to invest, there is a possibility for you to build wealth through investing.

However, though it is possible for you to make money through investing, it is possible to lose as well. Understand the whole question of risk is thus very important. Risk is in the eye of the beholder. Some people think that the sole risk they face in investing is directly related to profitability. If you make a profit, you beat the risk; if you have a loss, you lose.

Experienced investors understand that investing is a number game. You are going to have some losses along the way, and the key to succeed is creating profits that are higher than the occasional loss, and for which the dollar amount is much greater.

Here are a number of different risks every investor face when investing:

Market Risk

This is the risk that price will decline reducing the value of the investment with changing market condition, including the forces of supply and demand and interest rate changes

Knowledge and Experience Risk

The risk involves the combination of two things: your knowledge and experience risks. These include your investing background as well as the collective research you have performed for yourself in the past - performing online searches and studying books or magazines. Knowledge and experience ultimately determines how you view the markets and how you approach the selection of your investment

Foreign exchange risk

When the investment is in one currency (e.g USD) , and is different from the functional  currency of the investor (e.g Singapore Dollar), the investor is exposed to foreign exchange fluctuation.

Inflation risk

Increase in the cost of living (i.e. inflation) can erode the purchasing power of money. For investor, inflation requires ever-higher returns on your investment to offset the effects of inflation.