You may have never heard of the expression “investment glide path”, but it is an important concept to understand. An investment glide path is simply a person’s stock/bond mix (asset allocation) throughout the course of their lifetime.
For most people investing for retirement, when they are young and have an extended time until they retire, their portfolio can be invested aggressively and allocated primarily to growth investments (i.e. stocks).
However, as a person ages, and their expected retirement date draws near, it is normally appropriate to gradually become more conservative. Therefore, over time it is usually necessary to reduce exposure to stocks and slightly increase exposure to bonds.
Although the graph below shows what we would consider to be a pretty typical investment glide path, every investor is different. The investment glide path that is appropriate for you may be entirely different for others.
We believe it is our job, as your advisor, to effectively position your portfolio in the most appropriate investment glide path. Your glide path should meet your return requirements, while taking careful consideration of many other factors that are specific to you. Here are several things we consider when helping to direct you to an appropriate investment glide path:
The possibility and potential size of portfolio disbursements. Are portfolio disbursements expected in the short term? If so, how much money will you need to withdraw from your portfolio? Do these withdrawals represent a meaningful portion of your portfolio?
The careful consideration of your risk profile. How much risk do you need to take in order to meet your return requirements (risk required)? How much risk can you afford to take (risk capacity) given your asset base? How much risk can you emotionally accept (risk tolerance)?
Your track record of investor behavior. Are you the type of person who gets upset when your portfolio fluctuates? Are you susceptible to making emotion-driven investment decisions like selling stocks after a market decline? It is important to maintain an investment glide path that can minimize these counterproductive investor behavioral tendencies.
New Academic Research Suggests…
As you can imagine, there has been a substantial amount of research surrounding the most appropriate investor glide path. Recently, a study suggested investors should maintain the lowest amount of stock exposure in their lifetime at the beginning of retirement, but they should gradually increase stock exposure as they age. Doing so had the impact of protecting investors against poor returns in the first few years of retirement, while also increasing returns to protect against longevity risk. Stay tuned for more!