If you are a sports fan, I hope you had a chance to enter our March Madness contest. In a prior blog we provided some hints about potential strategies to win the contest. Those strategies, albeit simpler, are not unlike portfolios strategies we’ve consulted on in the past. The most inherent similarity is – do you take on a higher risk project (or team in the case of the contest) with the hope of a higher return or make a safe bet on getting any return? What is the right balance between higher risk projects and lower risk projects? The answer is…it depends.
Probably not the answer you were hoping for. Fortunately, there is a right answer, but it depends on a number of factors. Similar to your own personal investment portfolio, you are trying to balance the long-term potentially higher risk business investment options versus the low risk / low return options. The first factor to be considered is the risk tolerance of the business. If the tolerance is low, then at the first sign of trouble, the business decision-makers will want to dump the high risk options. Money will have been wasted because these projects likely should not have started in the first place.
Another similarity between the contest and the business world is that you want to choose a portfolio balance that beats the competition. Most business portfolios don’t achieve the optimal return, but a portfolio that beats the competition will continue to put your business in the lead. You may have seen this in your own business – assets, opportunities, or projects are chosen exclusively on their own merit and not in relationship to how it builds a winning portfolio. In the contest you were only given six choices. In the business world you could be investing in dozens of projects and/or assets, making the portfolio decision much more complex.
In the contest, the rules limited your choices to six teams. In the business world, the limitation is scarce resources such budget, personnel, or facility space. Due to a resource constraint each business must make careful decisions about which projects will fit into their portfolio. Each business must consider their risk tolerance and business strategy when building a winning portfolio. Along with those considerations, the business must consider their ability to execute their portfolio strategy under their resource constraints. The contest is simple with no real risk. The business world is complex with the business future on the line.
If you want help or advice on portfolio strategy, please contact us. We’ve helped with dozens of portfolio strategies and management processes. info@bellwetheranalytics.com
