Glide Path Formula?

The glide path formula is a method for calculating how the asset allocation of an investment portfolio should change over time. The formula typically uses the investor’s age or a target year to help determine an appropriate mix of stocks, bonds, and cash.

Most glide path formulas reduce exposure to stocks as targeted age or year approaches. There is no exact formula for your age or time until retirement, but knowing the basic ways you can use glide path formulas will help you plan your investment strategy.

What Is a Glide Path Formula?

The glide path formula is the name of a method or strategy used for calculating the asset allocation for investment portfolios or target-date mutual funds. The asset allocation is the percentage mix of stocks, bonds, and cash in the portfolio or mutual fund. The target date is typically a year that represents a particular date or decade in which an investor expects to reach their objective, such as retirement.

When investing using a target-date fund, the shift in asset allocation over time is simply called the fund’s “glide path.”1

How Do You Calculate the Glide Path Formula?

There are three major types of glide paths typically used in determining an appropriate asset allocation for an investment portfolio: Static Glide Path, Declining Glide Path, and Rising Glide Path. Here’s how each glide path formula works.

Static Glide Path

With this glide path, the investor uses the same target asset allocation but will periodically rebalance the portfolio to return to the target allocations.

For example, a common moderate allocation is 65% stocks and 35% bonds. During most calendar years, stocks will outperform bonds, which will skew the allocation toward stocks by the end of the year. At this time, the investor will place the appropriate trades to return the allocation to the original target of 65% stocks and 35% bonds.

Declining Glide Path

This glide path formula is common with target-date retirement funds, where a target year or decade is used in the formula to determine the asset allocation.

A classic glide path formula is:

100 – Age = Stock Allocation

Therefore, a 30-year-old investor would have an asset allocation of 70% stocks and 30% bonds. With longer life expectancy today, a more common formula is:

100 – Age + 14 = Stock Allocation

Using this formula, a 30-year-old investor would have an allocation of 84% stocks and 16% bonds. At age 31, the allocation would be 83% stocks and 17% bonds.

Rising Glide Path

The least common glide path, this formula would begin with an allocation more heavily weighted to bonds and would shift more to stocks as the bonds mature. For example, an allocation of 65% bonds and 35% stocks might change to 65% stocks and 35% bonds. As the bonds mature, the investor would purchase equities in the portfolio. Some investment advisors advocate for this strategy as a way to guard against significant losses during the crucial early years of retirement.

How the Glide Path Formula Works

The easiest way to apply the glide path strategy is to buy a target-date retirement fund. For example, an investor choosing a target-date 2050 fund expects to retire between the year 2050 and 2060. 

Since target-date retirement funds are designed to maintain an allocation appropriate for the target year or decade, the asset allocation will need to shift gradually toward a more conservative mix if the investor is maintaining a declining glide path strategy.

A typical target-retirement 2050 fund may have an asset allocation of roughly 80% stocks and 20% bonds. But as the target year approaches, stocks will receive a steadily declining allocation and bonds will receive a steadily increasing allocation. Cash can also become part of the allocation, especially as the target date draws closer.

Benefits of Glide Path Formulas

Investing with glide path formulas can be a simple, strategic way of combining passive and active management to reach an investment objective. Since stocks have greater market risk than bonds, it’s generally wise to decrease exposure to stocks as the time horizon of the objective nears its end. In this common application, a declining glide path can make sense for the investor.

Glide path formulas can prevent investors from attempting to time the market and invest according to market conditions. Since market timing tends to do more harm than good concerning portfolio returns, the glide path formula can be a wise tool for long-term investors.

Limitations of Glide Path Formulas

Investors should be careful not to rely on a single glide path formula for success. Because investing strategy depends so much on your age, long-term goals, and factors in the market, it’s helpful to talk to a financial advisor as you consider any changes in asset allocation before or during retirement.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.

9 replies on “Glide Path Formula?”

There are certainly lots of particulars like that to take into consideration. That could be a great point to bring up. I provide the ideas above as general inspiration however clearly there are questions like the one you carry up the place an important thing will be working in honest good faith. I don?t know if finest practices have emerged round issues like that, but I’m certain that your job is clearly identified as a fair game. Both boys and girls really feel the impact of only a second抯 pleasure, for the remainder of their lives.

I have been exploring for a little for any high-quality articles or blog posts on this sort of area . Exploring in Yahoo I at last stumbled upon this site. Reading this information So i抦 happy to convey that I have a very good uncanny feeling I discovered just what I needed. I most certainly will make sure to do not forget this web site and give it a glance on a constant basis.

Throughout the great scheme of things you actually receive a B- with regard to hard work. Exactly where you lost everybody was first on your details. You know, as the maxim goes, details make or break the argument.. And that could not be more accurate here. Having said that, permit me tell you just what exactly did give good results. Your authoring is extremely engaging and this is probably why I am making an effort in order to opine. I do not really make it a regular habit of doing that. Secondly, even though I can easily see a jumps in reason you come up with, I am not convinced of how you seem to unite your points that produce your final result. For now I shall subscribe to your position but hope in the foreseeable future you actually link your dots much better.

Thanks for making me to attain new ideas about pcs. I also have belief that one of the best ways to maintain your mobile computer in primary condition is a hard plastic-type case, or shell, which fits over the top of one’s computer. These kind of protective gear usually are model targeted since they are manufactured to fit perfectly above the natural outer shell. You can buy all of them directly from the seller, or via third party sources if they are available for your notebook, however not every laptop may have a cover on the market. Again, thanks for your tips.

Hi! I know this is kinda off topic nevertheless I’d figured I’d ask. Would you be interested in exchanging links or maybe guest authoring a blog post or vice-versa? My website addresses a lot of the same subjects as yours and I think we could greatly benefit from each other. If you’re interested feel free to shoot me an email. I look forward to hearing from you! Fantastic blog by the way!

In these days of austerity in addition to relative stress and anxiety about taking on debt, a lot of people balk about the idea of utilizing a credit card to make purchase of merchandise as well as pay for any gift giving occasion, preferring, instead to rely on the actual tried and also trusted means of making payment – hard cash. However, if you possess the cash available to make the purchase completely, then, paradoxically, that is the best time to be able to use the cards for several reasons.

I have observed that over the course of developing a relationship with real estate proprietors, you’ll be able to get them to understand that, in each and every real estate deal, a commission amount is paid. Eventually, FSBO sellers tend not to “save” the commission payment. Rather, they struggle to win the commission simply by doing a agent’s task. In doing this, they commit their money in addition to time to accomplish, as best they are able to, the assignments of an agent. Those obligations include uncovering the home via marketing, offering the home to all buyers, making a sense of buyer desperation in order to make prompt an offer, arranging home inspections, managing qualification inspections with the loan company, supervising repairs, and assisting the closing of the deal.

Leave a Reply

Your email address will not be published. Required fields are marked *