Investing for the Long Run

This paper studies long term investing by an investor that maximizes either expected utility from terminal wealth or from consumption. We introduce the concepts of a growth optimal portfolio (GP) and of the minimum price to... [ view full abstract ]

This paper studies long term investing by an investor that maximizes either expected utility from terminal wealth or from consumption. We introduce the concepts of a growth optimal portfolio (GP) and of the minimum price to attain target payouts. The paper finds that the dynamics of the GP needs to be captured and not the entire market dynamics, which simplifies significantly practical implementations of optimal portfolio strategies. Our concepts allow us to reconcile utility optimization with the practitioner approach of growth investing. We illustrate empirically that our new framework leads to improved lifetime consumption portfolio choice and asset allocation strategies.