Bridge over ocean
25 March 2019 Financial Analysts Journal Volume 75, Issue 2

Spending Policy Customization for Institutional Preferences

  1. James Yaworski, CFA

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.

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