“A Market-Yield Spending Rule” Revisited

Abstract

Observing that trustees must navigate their endowment and trust portfolios through the narrow channel that lies between spending too little or too much, the author explains the need for spending rules. He defines them as primitive tools that point the way through this uncharted terrain, given the uncertainty associated with future returns from stocks and bonds and the inflation and taxes that made erode these returns. He shows that the challenge faced by trustees as the balancing of current and future spending needs, a task which is not only an investment problem, but also a political and psychological issue as well. After having described current spending rules, he revisits an alternative he introduced in the late 1980s, a spending rule based upon dividends rather than market values, as the former have been far more stable than the latter. This article answers the criticism levied at the previous paper written in 1989. Certain readers, then, were skeptical of a rule that worked well in a back-test, but that didn't have any real-time experience under its belt. This article is meant to set such skepticism to rest, presenting twelve years of out-of-sample data covering the years 1987 through 1998.