Change Investment Strategies Throughout Life: The Glidepath - dummies

Change Investment Strategies Throughout Life: The Glidepath

By David Stevenson

The supposedly simple process of constructing a mix of assets that can be used as the building blocks of a single portfolio and can change over time, has evolved into a complex research literature at whose heart sits something called the glidepath, used in the UK and around the world.

A glidepath is an investment strategy that starts with high-risk assets, transitions through a balanced approach in mid-life and ends with a mixture of assets with a bias towards bonds later in life.

Glidepaths are almost as common as ‘amazing investment strategies’ in the world of finance! Every adviser, wealth firm and private bank has their own version. Crucially providers and advisers have their own starting and ending points as well as different relative combinations, but they all feature exactly the same blended glidepath.

The only real area of debate is whether a very young person needs some limited bond exposure and whether a retired person requires some equity exposure and at what level.

This simple analysis has evolved into a series of different permutations in the marketing-driven world of investment. Two popular glidepath structures are the target date fund and the target risk fund:

  • Target date fund: One of the most popular structures, a target date fund involves you sitting down, working out your planned retirement age (which will nearly always be massively wide of the mark, given changing longevity patterns) and then finding a fund that has the closest equivalent to that year: your target date.

  • Assume that the year is 2015, you’re aged 50 and you intend to retire at the age of 70 (in 2035). You’re going to be looking for a target date fund with the label 2035 stuck on it.

  • Target risk fund: An alternative to the target date fund is the target risk fund, which doesn’t use dates as such but risk tolerances. Because you have 20 years to go, you may be a typical middle-of-the-road risk-based investor, with a moderate or balanced risk/return profile.

This table shows a range of target date funds from a US exchange-traded fund provider called XShares, who works closely with stockbroker TD Waterhouse. You can see exactly how the mixture of assets changes over time as the investor ages and becomes wiser and more risk averse!

XShares TD Waterhouse Lifecycle Funds
Before Retirement Retirement After Retirement
Years 35 30 25 20 15 10 5 0 5 10 15 20
Equity (%) 100 100 100 90 82.5 75 60 50 37.5 30 25 20
Fixed income (%) 0 0 0 4 8.5 14 29 40 63.75 62 67.5 73
Real estate (%) 0 0 0 6 9 11 11 10 8.75 8 7.5 7
Age 30 35 40 45 50 55 60 65 70 75 80 85
Portfolio 2040 2030 2025 2020 2015 2010 2005

Be as careful about selecting a target date (or risk) fund as with any other fund. Examine the costs, the mixture of assets and the fund manager’s record.