Spending Policy Customization for Institutional Preferences

Abstract

Many research papers have demonstrated the shortcomings of popular spending rules—specifically, the tendency for rules to cause a loss of purchasing power over time. This study identifies the negative correlation between portfolio purchasing power and recommended spending rates as the primary cause of these shortcomings and the source of considerable fiduciary risk. Using this research, I outline a new spending rule, the “purchasing power rule,” which is designed to sustain portfolio value in a reliable manner. I present a framework based on the purchasing power rule for customizing spending rules to match organizational preferences and goals.

Disclosure: The author reports no conflicts of interest.

Editor’s note

This article was externally reviewed using our double-blind peer-review process. When the article was accepted for publication, the author thanked the reviewers in his acknowledgments. Mike Sebastian was one of the reviewers for this article.

Submitted 12 June 2018

Accepted 6 February 2019 by Stephen J. Brown

Acknowledgments

I would like to thank Mike Sebastian and one anonymous reviewer, as well as the editors. Stephen Brown in particular made significant contributions to the development of this paper. In addition, I’d like to thank Justin Stets, Adam Hoffmann, and Kelly Irvine for excellent research and editorial assistance.

Notes

¹ See Cary and Bright (1969); Advisory Committee on Endowment Management (1969).

² Markowitz’s research is referenced here as it pertains to the benefits of combining uncorrelated components into one portfolio. I have no reason to believe that the portfolios constructed here form an efficient frontier, such as the one discussed in Markowitz’s research. More efficient outcomes may be possible through the combination of other spending rules.