how glide path works
a target date fund is a fund offered by an investment company that seeks to grow assets over a specified period of time for a targeted goal e g retirement becoming automatically more conservative as time passes 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 desires a high degree of safety and liquidity because they might use the funds to purchase an annuity at retirement 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 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 or the longer the time horizon before retirement the greater the risk that one can take on which increases expected returns accordingly 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 types of glide pathsan 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 a portfolio may reduce their equity allocations by 1 each year they would then increase their allocation of safer assets such as treasury bills 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 re balanced 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 matures the portfolio may hold 60 equities and 40 bonds 