Just trying to get my head straight on this. I don’t have my books with the formulas so if anyone wants to flex some memory muscle by posting much obliged. I’m making this up so please do not rely on my explanation as correct…asked on 2009 morning exam 3-yr rolling average spending rule - pleace equal emphasis on portfolio values over last 3 years and applies 5% spending rate on the 3 yr average. Shortcoming - equal weight on all 3 years means that a strong market (and therefore portfolio value) 3 yrs ago would skew portfolio value upwards and $$ spending upwards (and vice versa). (Making this up) Geometric spending rule - takes last years begining portfolio value (1,100,000 for example) and applies some decay rate (40%) for a total of 440,000. then it adds (1-decay or 60%) of this years begining value (1,000,000 for example) for a total of 440+600 = 1,040,000 and applies a 5% spending to that??? Advantage is that it puts more weight on recent results than rolling average method. Commence smashing my understanding of geometric spending rules…

june2009 Wrote: ------------------------------------------------------- > Just trying to get my head straight on this. I > don’t have my books with the formulas so if anyone > wants to flex some memory muscle by posting much > obliged. I’m making this up so please do not rely > on my explanation as correct…asked on 2009 > morning exam > > 3-yr rolling average spending rule - pleace equal > emphasis on portfolio values over last 3 years and > applies 5% spending rate on the 3 yr average. > Shortcoming - equal weight on all 3 years means > that a strong market (and therefore portfolio > value) 3 yrs ago would skew portfolio value > upwards and $$ spending upwards (and vice versa). > > (Making this up) Geometric spending rule - takes > last years begining portfolio value (1,100,000 for > example) and applies some decay rate (40%) for a > total of 440,000. then it adds (1-decay or 60%) > of this years begining value (1,000,000 for > example) for a total of 440+600 = 1,040,000 and > applies a 5% spending to that??? Advantage is > that it puts more weight on recent results than > rolling average method. > > Commence smashing my understanding of geometric > spending rules… That’s how I understand it. The rolling average rule could result in more spending volatility because it applies the same weight to past values, which may be extreme.

Is this “Geometric spending rule” the same as “Geometric smoothing rule” in CFAI book[p387]? BTW, Schweser call it “Geometric spending rule”.

“Joy’s recommended smoothing rule is a geometric spending rule in which spending is based on a geometrically declining average of trailing endowment values.” IMO, this is more like a question of reading comprehension…it actually gives an explanation on the smoothing rule in the curriculum.