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By Dr. David Edward Marcinko MBA CMP™
Recognizing the risk that market volatility represents to long-term portfolio health, investment accounts and endowment funds utilize a variety of methods to calculate periodic payouts.
- Investment Yield: An investment portfolio using this method spends only its dividends and interest and re-invests any unrealized and realized gains. There would appear to be two primary disadvantages of this method. First, the payout amount will be extremely volatile as yields on equity and fixed income investments fluctuate. Second, the endowment manager could be encouraged to adopt a short-term focus on yield to the detriment of purchasing power preservation.
- Percentage of the Prior Year’s Ending Market Value: An endowment using this method would withdraw some fixed percentage of the prior year’s market value. As with the Investment Yield method, disbursements from the endowment can be somewhat volatile under this method.
- Moving Average: This approach, which is most common among educational institutions, generally involves taking a percentage of a moving average of the endowment market value. The percentage commonly approximates 5% over a 3-year period.
- Inflation Adjusted: This portfolio method simply adds some factor to the applicable rate of inflation for the institution or investor.
- Banded Inflation or Corridor: This account method is similar to the Inflation Adjusted method except that it establishes a corridor or band of minimum and maximum increases in an attempt to limit the volatility of the disbursement amounts.
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Conclusion
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Filed under: CMP Program, Portfolio Management | Tagged: certified medical planner, CMP, David E. Marcinko, Endowment Management, Portfolio Payout Methods | 1 Comment »
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