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Spending rules often guide institutions in determining the annual expenditures from their endowments. A typical rule is five percent of some measure of the value of the endowment. That many institutions utilize the same type of spending rule suggests that these institutions set their spending rules independent of their investment strategy. This paper argues that for many institutions the spending rule and the investment strategy need to be determined simultaneously. The key to understanding this simultaneity is the institution's willingness to reduce its endowment expenditures when the endowment drops in value.
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