Shall the principal be maintained at face value or should the endowment be managed so that the value of the endowment increases at the rate of inflation?
For example, if an organization has an endowment fund valued at $2 million and the earnings are used for current purposes, over time the endowment funds purchasing power will be reduced, although it will still show on the books at $2 million. Some organizations choose to reinvest an amount of the earnings equal to inflation in the endowment fund, in essence defining maintaining the principal as the principal adjusted for inflation. This is sometimes achieved by adopting a spending rule. For example, some organizations assume long term inflation at four percent and average portfolio return at nine percent, and thereby adopt a rule to spend five percent of the average market value of the endowment over the next three years.
