Bridge over ocean
1 September 2004 Financial Analysts Journal Volume 60, Issue 5

Sustainable Spending in a Lower-Return World

  1. Robert D. Arnott

Investors—whether corporate pensions, public pensions, foundations, endowments, or individuals—need to focus on “sustainable spending,” which is key to effective strategic planning. To assess sustainable spending, planners must start with the three building blocks of return for most assets—income, growth, and revaluation (changes in the yield offered by that investment). Analysis based on these components of historical equity and bond returns shows that the long-term investor cannot expect to receive in the future the commonly assumed 8–9 percent returns. With stock yields below 2 percent and bond yields of 5 percent, even a 5 percent spending rate may not be sustainable without future contributions from the investor.

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