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The PIR of Life

Updated: Sep 20, 2023

While teaching Fin 1 (an intro to finance course) at Harvard Business School, the Portfolio Improvement Rule (PIR) stood out as a key concept. The PIR delves into effectively managing the balance between risk and return in investment portfolios.

To help individuals shift from the theoretical understanding of PIR to impactfully applying it, I developed the Portfolio Improvement Rule for Life framework. This framework allows individuals to effectively manage the balance between risk and return, not only in their financial investments but also in their personal growth, professional development, and social impact.

By following the seven elements of this framework, individuals can optimize their life portfolio and achieve greater success, significance, and fulfillment.

  1. Defining Return - Success On Your Terms: The first step in applying the Portfolio Improvement Rule for Life is redefining the concept of return. Instead of solely focusing on financial gains, consider success and significance in a comprehensive life context. Return can encompass financial returns, professional accomplishments, personal growth, social impact, joy, and enjoyment. By defining return on our own terms, we can gain a broader perspective on what constitutes a fulfilling and rewarding life.

  2. Understanding and Assessing Risk: The second element of the rule is understanding and evaluating risk. We often perceive ourselves as risk-averse, which can limit our opportunities for growth and achievement. It is crucial to have an open and honest conversation with ourselves about risk and its implications. What are our perceptions of risk? Are we holding ourselves back due to perceived risk? As the saying goes, "The cave you're afraid to enter holds the treasure you seek." By challenging our understanding of risk, we can identify opportunities for growth and greater returns.

  3. Evaluating the Current Life Portfolio: The third element involves visualizing the current life portfolio. Similar to an investment portfolio, our life portfolio consists of experiences, knowledge, skills, and perceptions. This portfolio shapes our baseline and determines the range of possible outcomes. By assessing the current portfolio, we can identify areas for improvement and determine the starting point for the path to optimization.

  4. Setting the Risk-Free Mark: In the context of the Portfolio Improvement Rule for Life, setting the risk-free mark means identifying a point of reference or a comfort zone. It represents familiar territory and a sense of security. Just as financial investments have low-risk options like government securities or treasuries, we should consider our own risk-free zone. It is essential to question and challenge the true level of risk associated with this zone and understand the trade-offs between safety and potential returns.

  5. Identifying the Target Line: The target line is the optimal point in an individual's current life portfolio where risk and return intersect. It represents the balance between stretching our capabilities and pursuing audacious goals. Setting a "big, hairy, audacious goal" (BHAG) becomes crucial, pushing us to test our boundaries and strive for what we truly dream about. The target line serves as a guide for making strategic decisions and choosing paths that align with personal aspirations.

  6. Adding Investments - Taking Calculated Risks: Adding investments, the sixth element, refers to incorporating new experiences, opportunities, and relationships into our life portfolio. These investments, like commodities or private equity in financial terms, come with additional risks but also offer the potential for outsized returns. Just as a financial portfolio benefits from diversification, we should add these investments in small doses to our life portfolio. This gradual approach allows for exploration, learning, and growth while managing risk effectively.

  7. Outlining the Return Maximizing Strategy: The final element of the framework is outlining the return maximizing strategy. Similar to managing an investment portfolio, we need to recognize that optimizing their life portfolio is a journey. Depending on our internal and external conditions, we may choose to play it safe or take calculated risks. It's essential to have a plan that allows for progress over time, always pursuing the other end of the target line. We can move at their own pace, capitalizing on opportunities and adjusting our strategy as needed to maximize personal returns.

Remember, your life portfolio improvement is a journey. It may involve periods of taking a step back, reassessing, and repositioning yourself before moving forward. By applying the Portfolio Improvement Rule for Life, we can achieve higher returns without compromising our well-being. It has been crafted to enable users to navigate our modern life journeys, pursue audacious goals, and experience a well-balanced and fulfilling life.


Preparation Questions

Use the questions below to assess your current portfolio:

a. How do you define success (return)?

b. Would you describe yourself: risk-seeking or risk-averse?

c. How would you describe your current portfolio’s performance (underperforming, overperforming, meeting expectations, etc.)

Use the questions below to assess your BHAG:

a. What is your personal or professional BHAG (Big Hairy Audacious Goal)?

b. What has helped or impeded your progress towards your BHAG?

Explore your thoughts for the journey ahead:

a. What investments would you like to add to your portfolio and why?

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