What Is a Glide Path?
Let me explain what a glide path is. It's a formula that sets the asset allocation mix in a target-date fund, based on how many years are left until the target date. As the fund approaches that date, the glide path makes the allocation more conservative, meaning it shifts toward more fixed-income assets and away from equities.
How Glide Path Works
You should know that a target-date fund is offered by investment companies to grow your assets over a set period for a specific goal, like retirement, and it automatically gets more conservative as time goes on. Each group of these funds has its own glide path, which dictates how the mix of assets changes as you near the target date. Some glide paths are steep, making big shifts to conservatism just a few years out, while others are more gradual.
At the actual target date, the asset mix can differ a lot between funds. Some assume you'll want high safety and liquidity, maybe to buy an annuity at retirement, so they go very conservative. Others figure you'll keep holding the funds, so they include more equities to account for a longer horizon.
These target-date funds are popular for retirement savings because they're built on a straightforward idea: if you're younger or have more time until retirement, you can handle more risk for potentially higher returns. That means a young investor's portfolio should be heavy on equities. But as you get older, you shift to a conservative setup with fewer equities and more fixed-income investments.
Types of Glide Paths
There are a few types of glide paths you might encounter, and I'll break them down here.
Declining Glide Path
If you go with a declining glide path, you're gradually cutting back on equities each year as retirement gets closer. For instance, at age 50, you might have 40% in equities and reduce that by 1% annually, while boosting safer assets like Treasury bills.
Static Glide Path
A static glide path keeps your allocations the same over time. Say you hold 65% equities and 35% bonds—if market changes throw that off, you just rebalance back to those levels.
Rising Glide Path
With a rising glide path, you start with more bonds than equities, and the equity portion grows as bonds mature, assuming stocks hold their value. For example, you might begin at 70% bonds and 30% equities, then end up at 60% equities and 40% bonds after many bonds mature.
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