…and What’s the Problem with Getting it Wrong?
PBI’s Article in Issue 12 of the Journal of Aboriginal Management
In today’s markets, what is a reasonable long-term target return for a trust, and consequently a reasonable spending rate? The article “Finding the Right Balance Now, and for Future Generations” in JAM’s October 2012 issue claims a “7.5% target is a steep one in today’s markets, and likely requires heavy exposures to risky investment assets.” The article shows 7.5% is the total return that is required to maintain a 4% spending rate.
But is 7.5% really steep? We can judge this by considering a hypothetical trust with 40% of the trust’s funds invested in bonds and 60% in public equities, therefore avoiding “heavy exposures to risky investment assets”. Testing whether 7.5% is beyond reach will be as simple as determining reasonable target returns for the bonds and equities(…)
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