Evaluating Spending Policy Impact on Growth

XYZ Foundation is a large charitable organization that has recently reviewed its investment policy statement (IPS) in light of increasing demands on its resources. The foundation aims to balance the need for current spending to support its mission with prudently growing its investment assets to fund future initiatives. The foundation has a target asset allocation of 60% equities, 30% fixed income, and 10% alternative investments. On average, it distributes 5% of its net assets annually for operational and program expenses.

The investment committee is debating whether to implement a spending rule that allows them to increase the annual distribution to 6% during years when investment returns exceed 8%. They want to ensure that this revised spending policy aligns with their long-term growth objectives. Which of the following factors should the investment committee consider most critically when evaluating this proposal?