Portfolios for Long-Term Investors

How should long-term investors form portfolios in our time-varying, multi-factor, and friction-filled world? John Cochrane, a senior fellow at the Hoover Institution at Stanford University, former professor of finance at the University of Chicago Booth School of Business, and author of The Grumpy Economist blog describes in this Exceptional Advisor podcast two conceptual frameworks that 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.  John discusses how these perspectives can rationalize some of the investors' behaviors, suggest substantial revisions to standard portfolio theory, and help us to apply portfolio theory in a way that is practically useful.