Glide Path

What Is a Glide Path?

Glide path alludes to a formula that characterizes the asset allocation mix of a target-date fund, in view of the number of years to the target date. The glide path makes an asset allocation that ordinarily turns out to be more conservative (i.e., incorporates more fixed-income assets and less equities) as a fund draws nearer to the target date.

How Glide Path Works

A target-date fund is a fund offered by an investment company that tries to develop assets over a predetermined period of time for a targeted goal (for example retirement), turning out to be naturally more conservative over the long haul. Every family of target-date funds has an alternate glide path, which decides how the asset mix changes as the target date approaches. Some have an exceptionally steep direction, turning out to be decisively more conservative just a couple of years before the target date. Others adopt a more steady strategy.

The asset mix at the target date can be very unique too. Some target-date funds expect that the investor wants a high degree of safety and liquidity since they could utilize the funds to purchase an annuity at retirement. Other target-date funds expect that the investor holds onto the funds, and consequently remembers more equities for the asset mix, mirroring a longer time horizon.

Target date funds have become well known among the individuals who are saving for retirement. They depend on the simple reason that the more youthful the investor, or the longer the time horizon before retirement, the greater the risk that one can take on, which increases expected returns as needs be. A youthful investor's portfolio, for instance, ought to contain for the most part equities. Conversely, a more seasoned investor would hold a more conservative portfolio, with less equities and more fixed-income investments.

Types of Glide Paths

Declining Glide Path

An investor who utilizes a declining glide path continuously reduces their allocation of equities every year they draw nearer to retirement. For instance, at age 50, an investor who holds 40% equities in a portfolio might reduce their equity allocations by 1% every year. They would then increase their allocation of more secure assets, for example, Treasury bills.

Static Glide Path

A portfolio that utilizes a static glide path keeps up with similar allocations. For example, an investor might hold 65% equities and 35% bonds. Assuming these allocations stray due to price changes in the assets, the portfolio is re-adjusted.

Rising Glide Path

Portfolios that utilization this approach initially have a larger allocation of bonds compared to equities. The equity allocation increases as the bonds mature, as long as the stocks in the portfolio don't diminish in value. For instance, an investor's portfolio could begin with an allocation of 70% bonds and 30% equities. After a large portion of the bonds matures, the portfolio might hold 60% equities and 40% bonds.