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Evaluating Spending Policies in a Low-Return Environment

Author

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  • Peng Wang
  • Laura Chapman
  • Steven Peterson
  • Jon Spinney

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. Disclosure: The authors report no conflicts of interest. Editor’s Note Submitted 13 October 2017 Accepted 12 April 2018 by Stephen J. Brown

Suggested Citation

  • Peng Wang & Laura Chapman & Steven Peterson & Jon Spinney, 2018. "Evaluating Spending Policies in a Low-Return Environment," Financial Analysts Journal, Taylor & Francis Journals, vol. 74(4), pages 11-23, September.
  • Handle: RePEc:taf:ufajxx:v:74:y:2018:i:4:p:11-23
    DOI: 10.2469/faj.v74.n4.1
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