Spending rule

The formula that sets how much is withdrawn from a portfolio each year, often a percentage of a smoothed average of past values so that spending does not swing with markets.

Where you will meet it

Spending rule appears in 4 learning outcomes on the CFA syllabus. A few of them:

• Analyse an asset allocation and its construction against the portfolio's return and risk targets and cash needs, and propose actions to close any gaps
  CFA Level III · Portfolio Management Pathway

  “Remedies include slowing commitment pacing, raising liquid reserves, arranging a credit line, adopting a smoothed spending rule or rebalancing with overlays.”

• Propose planning and investment measures to protect a client's purchasing power from being eroded by inflation
  CFA Level III · Private Wealth Pathway

  “Planning measures include a flexible spending rule and preserving human capital.”

• Propose and defend changes to an asset allocation after a shift in the investor's objectives or constraints
  CFA Level III · Asset Allocation

  “Typical cases include a large inheritance, retirement, a new goal, a pension plan closing to new members or freezing benefits, or a change in a foundation's spending rule.”

• Discuss for each type of institutional investor who has a stake in the portfolio, what it owes, how long it can invest and how much liquidity it needs
  CFA Level III · Portfolio Construction

  “Foundations fund grants, often under minimum spending rules.”

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with S · Glossary