How do endowments typically aim to balance their spending with returns?

Endowments generally aim to balance their spending with returns by adopting a strategy that focuses on aligning their spending rate with sustainable and stable expectations regarding investment returns. This approach ensures that the endowment can support its financial obligations, such as scholarships or grants, without jeopardizing the principal amount over the long term.

A well-managed endowment will typically determine a sustainable spending rate based on its expected returns, taking into account factors such as market conditions, inflation, and the long-term financial objectives of the institution. By focusing on a balance of substantial spending with realistic return expectations, endowments strive to maintain their financial health, allowing them to fund their initiatives for many years into the future without depleting their assets.

This strategy contrasts with the other options. For instance, minimizing all expenses might lead to insufficient funding for necessary programs, and ensuring spending rates exceed returns could eventually undermine the endowment's principal. Relying on market timing is often considered imprudent since it attempts to predict short-term market movements, which can be exceptionally challenging and risky. Therefore, focusing on a balance of spending and sustainable return expectations is the most prudent approach for endowments.