Forex100 Academy Educational Series – (21 June 2019)
The Power of Forex Trading in your Investment Portfolio
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If you have one of these lingering questions:
“Where can I find a good financial instrument with extraordinary returns (if done correctly)?”
“What do I incorporate it into my investment portfolio?”
This FREE E-Book is aimed to help you find the answers that can let you achieve your financial goals.
Course Director – Harmonic Trader
The Pareto Principle
The Pareto Principle (also known as the 80/20 rule) states that, roughly 80% of the effect comes from 20% of the causes. It has been suggested that this principle has been named after an Italian economist Vilfredo Pareto.
In Pareto’s study, he observed that 80% of the land in Italy was owned by 20% of the population. I guess that this is the reason why people say “Life is not fair”, because things are naturally not distributed equally but instead on the 80/20 distribution.
To add on to the statement of that life isn’t fair, 80% of the world’s wealth are owned by the 20% of the richest people.
Same Observation Everywhere
In various disciplines, you will tend to see this similar observation. To name a few:
- Workforce – 80% of the results are produced by 20% of the workers
- Programming – 80% of the crashes are caused by 20% of the bugs
- Technology – 80% of the users only uses 20% of your product features
- Sales – 80% of the total sales comes from the top 20% of the sales people
- Customers – 80% of your problems comes from 20% of your worst customers
Remember this is not a law, but just an observation. So, let us not start to force everything around us into the 80/20 rule.
Hence, an important note to all business owners, you might want to identify and concentrate more on the top 20% of your products and the top 20% of your staff as they will probably will be generating most of your company’s profits.
This applies to investments too. Many investors out there would have subscribed to the idea of portfolio diversification across different asset classes. The diversification into a higher risk higher returns could potentially generate a good return for the investor.
Here is an example to illustrate the returns of the different portfolio:
|Eg : Instrument||Amount Invested||Returns||Absolute Returns|
|Bonds||100,000 (40%)||2%||2000 (16%)|
|Unit Trusts||80,000 (32%)||4%||3200 (26%)|
|Dividend Stocks||50,000 (20%)||6%||3000 (25%)|
|Forex Trading||20,000 (8%)||20%||4000 (33%)|
|Total||250,000 (100%)||12,200 (100%)|
* This is only for illustration purposes. It should not be construed in any form as a financial advice. Please check with your financial planner for your personal investment advice.
A small allocation (8%) of the total asset into a higher risk higher returns instrument such as Forex Trading could potentially generate a large part (33%) of the total returns.
This potentially extraordinary high returns via Forex Trading is very possible and achievable. However, it must be approached with the proper mindset to succeed.
The DOs in trading:
- Treat it like a business and understand the risks that you are embarking on
- It’s a probability game, where you only take the trades when the odds are with you
- Trade on the time frame that suits your lifestyle. You want it to be sustainable
- Only risk the amount that you are comfortable with, don’t lose sleep over it
- Be focused and discipline. Plan your trades and trade your plan
Find a suitable mentor who can guild you through the mine fields of your trading journey. Explore trading strategy that suits your temperament. Test it, trade it and improve on it.
Going back to the Pareto Principle. In trading there will also be that 20% of the trades that will give you 80% of your profits.
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