What is a Glide Path?
The glide path formula determines the asset allocation mix of a target-date fund depending on the number of years until the target date. As a fund approaches its goal date, the glide path produces a more conservative asset allocation with more fixed-income assets and fewer stocks.
How Glide Path Works
An investing company’s target-date fund grows assets over a fixed period for a specific objective, such as retirement, becoming more conservative over time. Target-date fund families have distinct glide paths, which affect asset composition as the target date approaches. Some rapidly become more cautious a few years before the goal date. Others proceed gradually.
The asset mix at the target date may also vary. Target-date funds may presume investors want safety and liquidity to purchase an annuity at retirement. Other target-date funds assume the investor keeps the money and contains more securities, reflecting a longer time horizon.
Retirement savers like target date funds The theory states that younger investors, or those with a longer time horizon until retirement, can take on more risk, leading to higher predicted returns. A young investor’s portfolio should be essentially stocks. In contrast, older investors tend to have a more cautious portfolio, with fewer shares and more fixed-income assets.
Types
Lower Glide Path
Investors on a falling glide path steadily decrease their equity allocation as they near retirement. An investor with 40% equities at 50 may cut their stock holdings by 1% a year. They would then allocate more Treasury notes and other safer assets.
Stable Glide
A static glide-route portfolio keeps its allocations. An investor may have 65% stocks and 35% bonds. Rebalancing occurs if asset prices modify these allocations.
Rising Glidepath
Portfolios using this method start with more bonds than stocks. The equity allocation rises as bonds expire, as long as portfolio stocks don’t fall. An investor’s portfolio may start with 70% bonds and 30% shares. Once a significant fraction of bonds matures, the portfolio may comprise 60% stocks and 40% bonds.
