Portfolios for Long-Term Investors
How should long-term investors form portfolios in our time-varying, multi-factor and friction-filled world? Two conceptual frameworks may help: First, look directly at the stream of payments that a portfolio and payout policy can produce. Second, include a general equilibrium view of the markets' economic purpose, and the nature of investors' different preferences, risk-taking ability, and function in that equilibrium. These perspectives can rationalize some of investors' behaviors, suggest substantial revisions to standard portfolio theory, and help us to apply portfolio theory in a way that is practically useful.
This paper is based on a keynote talk prepared for the NBER conference, “New Developments in Long-Term Asset Management Spring 2021.” I thank John Campbell, Alex Edmans, Gene Fama, Jim Poterba, Luis Viceira and a referee for helpful comments. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
John H Cochrane, 2022. "Portfolios for Long-Term Investors," Review of Finance, vol 26(1), pages 1-42.