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The Journal of Wealth Management

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Primary Article

Simulation-Based Spending Rules for Investment Funds

Revision and Comparison to Other Methods

Bala G. Arshanapalli, Edmond L. D'Ouville and William B. Nelson
The Journal of Wealth Management Winter 2002, 5 (3) 20-26; DOI: https://doi.org/10.3905/jwm.2002.320451
Bala G. Arshanapalli
The Gallagher-Mills Chair in Economics and Business at Indiana University Northwest in Gary, IN.
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  • For correspondence: barshana@iun.edu
Edmond L. D'Ouville
An associate professor of business administration at Indiana University Northwest in Gary, IN.
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  • For correspondence: edouvill@iun.edu
William B. Nelson
An associate professor of finance at Indiana University Northwest in Gary, IN.
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  • For correspondence: wnelson@iun.edu
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Abstract

The authors focus on the problem of determining the most appropriate cash withdrawal plan from an investment portfolio and investigate different methodologies. They note that economic theory suggests that an optimal spending rule needs to maximize some multi-period utility function, but argue that this is merely a formal restatement of the problem and not an operational solution. They suggest that an important consideration should be the volatility or variability of the cash withdrawal stream over time. They fault market-based spending rules arguing that spending then reflects the volatility of the investment portfolio. Noting that the use of Monte Carlo techniques to determine spending plans is growing, they show that there exist certain flaws in the way simulation is used to address this cash withdrawal problem. They ultimately argue that the plans generated by a simulation approach are essentially equivalent to other approaches, require the same type of evaluation, and offer little not already available to planners facing this situation.

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The Journal of Wealth Management
Vol. 5, Issue 3
Winter 2002
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Simulation-Based Spending Rules for Investment Funds
Bala G. Arshanapalli, Edmond L. D'Ouville, William B. Nelson
The Journal of Wealth Management Oct 2002, 5 (3) 20-26; DOI: 10.3905/jwm.2002.320451

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Simulation-Based Spending Rules for Investment Funds
Bala G. Arshanapalli, Edmond L. D'Ouville, William B. Nelson
The Journal of Wealth Management Oct 2002, 5 (3) 20-26; DOI: 10.3905/jwm.2002.320451
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