The Grumpy Economist: The Long-Term Investor’s Portfolio


“Portfolios for Long-Term Investors” published, financial review 26(1), 1-42. (2022). This Standard link Available if you have institutional or personal access.I can’t post a free access link here, but I can at my page where will you find it.


Topic: How do we explain the huge gap between portfolio practice and portfolio theory? Given that the world has time-varying expected returns and time-varying returns and correlations, how can we make portfolio theory useful? I advocate a more price- and pay-out view because long-term bond investors should buy index perpetuals and ignore one-period returns. I advise people to think about markets and equilibrium. Ordinary investors must hold market portfolios. Anything else is a zero-sum game. So find out why you are different from the average. (If you think you’re smarter than the average person, be aware that they think they’re smarter than you.) The results encapsulate some age-old advice: buy stocks for dividends, interpreted broadly. Take risks you can afford. If stocks are highly valuable to other investors for technical (liquidity, short selling restrictions, etc.) or behavioral reasons, avoid them.

This paper stems from summaries I have given to MBA and PhD students in the past. There aren’t any equations, but plenty of advice on how to better complete academic portfolio theory and better connect with your target audience. Special thanks to Monika Piazzesi and Luis Viceira, who invited me to do the foundations of this talk, and Alex Edmans, who led it to publication.



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