Many of life’s big lessons and decisions can be applied to investment strategies. One that has risen to prominence over the last few years is that of the 40/70 rule. It aims to ensure opportunities are taken based on the amount of information known, while also preventing too much hesitation. Below is a breakdown of how the 40/70 rule works and when to apply it.
What is the 40/70 Rule?
The 40/70 rule is a decision-making process. It suggests that when making a decision, you need between 40% to 70% of the information regarding the topic.
In life, it is rare we have all the facts when making a decision and see a totally clear picture. Less than 40% of the information means we know too little and it becomes too big a risk.
If you wait to have more than 70% of the information, then the decision is probably going to take too long to make. Opportunities may pass you by, or the decision may be made on your behalf due to external circumstances. Thus, anything between 40% and 70% is a good benchmark, balancing between perfection and speed.
The Background to the 40/70 Rule
The 40/70 rule came from Colin Powell. A US Army veteran of 35 years and a 4-star general, he later served as the 65th United States Secretary of State. Inevitably, these occupations throw up the prospect of having to make tough decisions, and this was one way he would make them.
Many other successful people have used this tactic. Charles Levin is a champion chess player, author and poker player. He believes it is critical to achieving success in Texas Holdem poker. The aim is to have a better hand than your opponent and use it to bet against them and take money from the pot. Knowing the hands is crucial to this, but so is the probability dictated by what cards are already in play and how many people are at the table. When you have this, you are often still asked to make decisions without having all the information.
Levin also applies it to looking at success. Where Colin Powell says you need 40% to 70% of the information to make a decision, Levin thinks you should measure this as a success rate. When you think it has less than a 40% chance of succeeding, don’t go for it. If it is between that and 70%, go for it. If you wait for it to go beyond this, you may have missed the window of opportunity.
Applying it to Investment Decisions
In both iterations, you can use the 40/70 rule to make decisions on investments. Here, you will never have the whole picture either. But can you gain between 40% to 70% of the information that tells you it’s a good investment? Does it have a 40% to 70% chance of working out? If so, then go for it.
All investments come with risk, and there are few certainties. However, this is a method that has worked for some of the most successful people on earth. There is no reason it won’t work for you.
FAQs
What does the 40/70 rule mean in investing?
The 40/70 rule in investing means you should make a decision when you have 40% to 70% of the necessary information. It helps balance risk with timeliness.
How do I calculate 40% to 70% confidence in an investment?
Evaluate how much information you’ve gathered—financial data, market trends, news, and risk factors—and estimate your confidence in the investment’s success. If it falls between 40% and 70%, you’re in the decision-making sweet spot.
Can the 40/70 rule guarantee success?
No, the 40/70 rule doesn’t guarantee success, but it reduces indecision and missed opportunities. It’s a tool to help you act with reasonable confidence.
Is the 40/70 rule useful for beginner investors?
Yes, it’s especially helpful for beginners who struggle with overanalyzing. It gives a clear framework to start making smarter, faster decisions without needing perfect knowledge.
Who created the 40/70 rule?
General Colin Powell, a U.S. Army veteran and former Secretary of State, introduced the rule based on his experience making critical decisions with incomplete information.
