Glide Path
Candlefocus EditorGlide path is an investment strategy that aims to provide a balance between performance and risk in one’s retirement investments. As assets grow closer to their goal (retirement), the glide path strategy reduces the risk of those investments by decreasing the percentage of the portfolio that is invested in equities and increasing the percentage of the portfolio that is invested in more stable investments such as bonds and cash. The goal is to reduce the volatility of the portfolio in order to more efficiently achieve the investor’s objective.
The implementation of a glide path will typically involve swapping out markets and instruments to meet the investor’s goals and risk profile. For example, if a portfolio contained equities, the amount of equities in the portfolio may decrease while the amount of bond investments increase. Other elements that may be included in a glide path strategy might be reduction of foreign market exposure, increasing allocations to corporate bonds or other fixed income instruments and allocating to other investments such as real estate and alternative investments.
Glide paths aren't just for retirement. Institutional investors also commonly use glide path strategies in their overall investment portfolios. An institution may begin with an aggressive investment strategy to try and reach its desired return, but over time they may reduce their risk-taking strategies as they move towards reaching their goal. This could mean reducing their equity exposure, increasing their allocation to bonds, and potentially focusing their investments in U.S. equities rather than the international market.
By gradually reducing the level of risk, investors can reduce the chances of their retirement funds being seriously damaged if there is a market downturn. The glide path strategy helps to ensure that retirement savings are not moving too heavily toward high-risk investments before retirement. A glide path also helps investors avoid having to make sudden drastic changes in their retirement portfolio when closest to retirement, as this could potentially cause them to miss out on benefit from the markets if that particular year was to be a positive one.
Glide path strategies provide stability, peace of mind and some risk management when it comes to retirement planning. As occasions and markets change, it's important to ensure that your retirement portfolio is following a glide path that matches your individual risk tolerance and investment goals.