Using the martingale approach to portfolio optimization in incomplete market settings, we solve for the optimal allocation of a long‐term investor facing short‐ term constraints in the presence of interest rate risk, as well as unspanned equity expected return and volatility risks. Our main result is a general analytical representation of the relationship between optimal strategies in the presence and in the absence of short‐term constraints, expressed both in terms of optimal payoffs and optimal portfolio weights. This result allows us to disentangle the impact of short‐term constraints from the impact of return predictability on the optimal allocation decision. It also allows us to provide a formal analysis of the much debated conflict between long‐term objectives and short‐term constraints.