Evaluating Spending Policies in a Low-Return Environment. Issue 4 (1st September 2018)

• Record Type: Journal Article
• Authors: Wang, Peng; Chapman, Laura; Peterson, Steven; Spinney, Jon
• Is Part Of: Financial analysts journal. Volume 74:Issue 4(2018)
• Page Start: 11
• Page End: 23
• Publication Date: 2018-09-01
• Subjects: Investment analysis -- Periodicals; Investment analysis; HW_FM; Periodicals; Electronic journals; 332.6
• DOI: 10.2469/faj.v74.n4.1
• Languages: English
• ISSNs: 0015-198X

Abstract

Abstract : For an endowment seeking to minimize payout variability while preserving the long-run health of the institution, appropriate spending policy is a crucial choice. We study two competing methods for setting spending policy—the "moving-average" method and the "snake-in-the-tunnel" (SIT) approach. We show that the SIT approach may significantly decrease the possibility of spending reductions in the short run. Additionally, the SIT approach with 3%–7% bands allows for a smooth evolution of payouts over time, which enhances spending predictability while preserving the endowment's real (inflation-adjusted) long-run purchasing power. Abstract : Disclosure: The authors report no conflicts of interest. Editor's Note Submitted 13 October 2017 Accepted 12 April 2018 by Stephen J. Brown