Evaluating Spending Policies in a Low-Return Environment

摘要

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.