What Is a Glide Path?
Glide path refers to a formula that defines the asset allocation mix of a target-date fund, based on the number of years to the target date. The glide path creates an asset allocation that typically becomes more conservative (i.e., includes more fixed-income assets and fewer equities) as a fund gets closer to the target date.
How Glide Path Works
A target-date fund is a fund offered by an investment company that seeks to grow assets over a specified period for a targeted goal, such as retirement, becoming automatically more conservative as time passes. Each family of target-date funds has a different glide path, which determines how the asset mix changes as the target date approaches. Some have a very steep trajectory, becoming dramatically more conservative just a few years before the target date, while others take a more gradual approach.
The asset mix at the target date can be quite different as well. Some target-date funds assume that the investor desires a high degree of safety and liquidity because they might use the funds to purchase an annuity at retirement. Other target-date funds assume that the investor will continue to hold onto the funds, and therefore include more equities in the asset mix, reflecting a longer time horizon.
Target-date funds have become very popular among those who are saving for retirement. They are based on the simple premise that the younger the investor, or the longer the time horizon before retirement, the greater the risk tolerance can be, thus increasing expected returns accordingly. A young investor’s portfolio, for example, should contain mostly equities. In contrast, an older investor would hold a more conservative portfolio, with fewer equities and more fixed-income investments.
Types of Glide Paths
Declining Glide Path
An investor who uses a declining glide path gradually reduces their allocation to equities each year as they get closer to retirement. For example, at age 50, an investor who holds 40% equities in a portfolio may reduce their equity allocations by 1% each year. They would then increase their allocation of safer assets, such as Treasury bills.
Static Glide Path
A portfolio that uses a static glide path maintains the same allocations over time. For instance, an investor may hold 65% equities and 35% bonds. If these allocations deviate due to price changes in the assets, the portfolio is re-balanced to maintain the same proportions.
Rising Glide Path
Portfolios that use this approach initially have a larger allocation of bonds compared to equities. The equity allocation increases as the bonds mature, provided that the stocks in the portfolio don’t decrease in value. For example, an investor’s portfolio might start with an allocation of 70% bonds and 30% equities. After a significant portion of the bonds matures, the portfolio may hold 60% equities and 40% bonds.
Related Terms: asset allocation, time horizon, liquidity, equities, fixed-income investments.
