Tanya Mohanraj

A glide path refers to the alteration in a target date fund’s asset mix as time goes by. In other words, a glide path defines how the asset mix within a target date fund will change over time.

A target date fund is a fund offered by investment companies that seek to grow its assets with a target goal. An example of a target date fund is the Vanguard Target Retirement 2050 Fund, which caters to investors who want their assets invested with a target goal of retirement between 2048 and 2052.

Each target date fund has a predetermined glide path, which describes how the asset mix in the fund will change over time. Using the Vanguard Target Retirement 2050 Fund as an example, its glide path is described as follows:

“The glide path starts with 90% equity exposure until 25 years to retirement [the fund assumes retirement around 2050] and continues to decline until arriving at a 30% equity stake seven years after retirement.”

The glide path of the fund as of December 2021 is visually represented below:

Source

Glide paths commonly go from higher-risk securities (such as equities) to lower-risk securities (such as bonds), as is conveyed in the graphic above. Such a practice helps manage risk. As an investor ages and nears retirement, their ability to bear risk decreases due to a shorter investment horizon. A glide path helps modify the fund’s risk exposure in accordance with the investor’s investment time horizon.

The three main types of glide paths are:

A static glide path has the same asset allocation as time goes by—for example, an asset mix of 65% equities and 35% bonds. In a static glide path, if there are deviations in the asset mix due to changes in the market values of the underlying securities, it is rebalanced back to the original asset allocation.

A hypothetical static glide path with an asset allocation of 65% equities and 35% bonds is shown below:

A declining glide path is the most commonly used. A target date fund with a declining glide path gradually reduces its exposure to higher-risk securities as time goes by. For example, an asset mix starting at 100% equities and gradually declining to 50% equities and 50% bonds over the span of ten years.

In effect, a declining glide path gradually reduces a fund’s risk over time.

A rising glide path is uncommon. A target date fund with a rising glide path gradually increases its exposure to higher-risk securities as time goes by. For example, an asset mix starting at 80% bonds and 20% equities gradually increasing to 80% equities and 20% bonds over a span of ten years.

A rising glide path is generally not well suited for investors, as it implies increasing risk as time goes by. A target date fund with a rising glide path has a significant risk of not meeting its target goal.

A declining/rising glide path can be “to” or “through.”

In a “to” glide path, the asset allocation continues to adjust up until the fund’s target date. After reaching the target date, the asset allocation would become static.

In a “through” glide path, the asset allocation continues to adjust even after reaching the target date.

An investor can create a declining glide path for their own investment portfolio through the Rule of 100. The Rule of 100 determines a glide path by simply subtracting your age from 100 to determine the portfolio’s equity allocation, with the remaining put into bonds.

For example, an investor aged 30 using the Rule of 100 would allocate 70% (100 – 30) of their portfolio to stocks and the rest to bonds.

The Rule of 100 would imply the following equity/bond asset allocation at each given age:

Background: Samantha is currently 25 years old and looking at a target date fund to invest her money with. She plans to retire in 2060 and holds found two applicable target date funds with a retirement goal of 2060 and the following glide path descriptions:

Target Date Fund 1

The glide path maintains an 80% equity exposure until 25 years before the target date of 2060, when the equity exposure will decline gradually to eventually arrive at a static 10% equity stake and 90% bond stake at the target date.

Target Date Fund 2

The glide path maintains a static 50% equity exposure and 50% bond exposure through the target date.

Question: Samantha has indicated that she is comfortable bearing high risk right now, but as she approaches retirement, she would like the portfolio’s risk to decline substantially. As a financial advisor, which target date fund do you think would be best suited for Samantha?

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