What is '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.

BREAKING DOWN 'Glide Path'

Target date funds have become 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 before retirement, and the greater the risk he or she can take to increase returns potentially. 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.

Glide Path Specifics

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. 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 wants 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 holds onto the funds, and therefore includes more equities in the asset mix, reflecting a longer time horizon.

Types of Glide Paths

  • Declining Glide Path: An investor who uses a declining glide path gradually reduces their allocation of equities each year they get closer to retirement. For example, at age 50, an investor who holds 40% equities in his or her 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. 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 rebalanced. (To learn more, see: Strategic Asset Allocation to Rebalance Portfolios.)
  • 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, as long as 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 large portion of the bonds mature, the portfolio may hold 60% equities and 40% bonds.
RELATED TERMS
  1. To Fund

    To fund is a type of target-date retirement fund whose asset ...
  2. Lifestyle Fund

    A lifestyle fund is an investment fund that manages a diversified ...
  3. Asset Mix

    Asset mix is the breakdown of all assets within a fund or portfolio. ...
  4. Asset Allocation Fund

    An asset allocation fund is a fund that provides investors with ...
  5. Asset Allocation

    Asset allocation is the process of deciding where to put money ...
  6. Tactical Asset Allocation - TAA

    An active management portfolio strategy that rebalances the percentage ...
Related Articles
  1. Financial Advisor

    Target-Date Funds Vs. Risk-Based Funds

    Learn the difference between target-date funds and risk-based funds to determine which would be most appropriate for your retirement portfolio.
  2. Retirement

    The Unknown Dangers of Target Date Funds

    If they fit within your risk tolerance and have reasonable fees, target date funds can be an option.
  3. Personal Finance

    How to Prepare Your Children for Financial Independence

    Here's how to get your recent graduate on the road to financial independence.
  4. Investing

    When to Use Target-Date Funds

    Learn about the different uses for target-date funds. Understand the risks and considerations for making an investment in a target-date fund.
  5. Investing

    Target Date Funds: More Popular, Cheaper Than Ever

    How target date funds can help investors weather volatility when it comes to saving for retirement.
  6. Financial Advisor

    Target Date Funds and the Fiduciary Rule: What to Know

    Are you a fan of selling target date funds to clients? You may be interested in how the market for them will change with the new DoL fiduciary rule.
  7. Managing Wealth

    VFIFX: Overview of Vanguard Target Retirement 2050 Fund

    Explore the Vanguard Target Retirement 2050 Fund and its investment objective, portfolio composition, management, performance and investment terms.
  8. 6 Asset Allocation Strategies That Work

    Your portfolio’s asset mix is a key factor in its profitability. Find out how to achieve this delicate balance.
  9. Managing Wealth

    Achieve Optimal Asset Allocation

    Minimize risk while maximizing return with the right mix of securities and achieve your optimal asset allocation.
  10. Retirement

    Who Actually Benefits From Target Date Funds?

    This pre-packaged retirement investment option could be the perfect fit for some investors and a downfall for others. Which are you?
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  3. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  4. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
Trading Center