What is the 'Glide Path'
The 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 becomes more conservative (i.e., includes more fixed-income assets and fewer equities) the closer a fund gets to the target date.
BREAKING DOWN 'Glide Path'
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, the longer the time horizon he or she has and the greater the risk he or she can take to potentially increase returns. 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.
Each family of target date funds will have 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. Others will 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 will want a high degree of safety and liquidity, because he or she might use the funds to purchase an annuity. Other target date funds assume that the investor will hold onto the funds, and will therefore include more equities in the asset mix, reflecting a longer time horizon.