What is a Glide Path?
Learn about glide paths, how they are used in target-date funds, and how they adjust asset allocations as an investor approaches retirement.
A glide path is an investment strategy, commonly used in target-date funds, where the asset allocation gradually shifts from higher-risk, higher-return investments (such as stocks) to lower-risk, lower-return investments (such as bonds) as the investor approaches their retirement date or target age.
How the Glide Path Works
The glide path aims to reduce risk as the target date approaches, protecting the investor’s assets as they get closer to needing them. Here’s how it works:
Early Years: In the early years of investing, a target-date fund with a glide path will allocate a larger portion to equities (stocks) because there’s more time for growth and recovery from potential market downturns.
Approaching Retirement: As the target date nears, the fund gradually shifts towards a more conservative asset allocation by increasing bonds and reducing stock holdings. The goal is to preserve the portfolio’s value as the investor approaches retirement.
Post-Retirement: After the target date passes, the fund continues to shift to even more conservative investments, such as cash or other low-risk assets, to protect against market volatility and provide income for the retiree.
Types of Glide Paths
Glide paths can be designed in different ways, depending on the target-date fund’s strategy. The two main types are:
Constant Glide Path: The asset allocation changes at a steady, predetermined rate over time.
Dynamic Glide Path: The asset allocation changes based on factors like market conditions, volatility, or the investor’s remaining time to retirement.
Example
Imagine you’re 30 years old and have invested in a target-date fund with a 2060 retirement date. Early on, the fund might allocate around 80% of your investments to stocks for growth potential. As you approach retirement around 2060, the fund will gradually reduce the stock allocation (e.g., 40%) and increase bonds (e.g., 60%) to decrease risk. This gradual shift helps protect your portfolio from market fluctuations as you near retirement.
Benefits of a Glide Path
The glide path strategy offers several benefits:
Risk Reduction: The gradual shift to more conservative investments helps reduce risk as you near retirement, minimizing the impact of market volatility.
Automatic Adjustment: The glide path automatically adjusts your asset allocation, requiring no active management, making it an easy option for long-term investors.
Considerations
While glide paths are designed to be hands-off and suitable for retirement savings, they may not be the best fit for every investor. Some individuals may prefer a more active approach to managing their portfolio or have unique financial goals that require a different strategy.
