Playbooks / Portfolio
Glide paths, and the one that rises
The rule
A glide path is the schedule by which a portfolio's equity share changes over time. Almost every target date fund has one, almost every piece of retirement advice assumes one, and the assumed shape is always the same: more equities when young, fewer when old.
The reasoning is sound as far as it goes. A young investor has decades for a bad decade to recover in and a salary that keeps arriving. Somebody drawing an income has neither, and a fall early in drawdown does permanent damage because units sold cheaply never participate in the recovery. That is sequence of returns risk, and it is concentrated in the years either side of the date the withdrawals start.
So far, uncontroversial. Then somebody tested it.
The result that surprised people
Pfau and Kitces examined 121 different paths, with starting and ending equity allocations running from zero to one hundred percent in ten point steps, adjusted in a straight line across retirement.
The paths that did best were not the declining ones. An allocation starting around thirty percent equity at retirement and rising to eighty percent by its end produced the highest success rate at a four percent withdrawal. On the size of the shortfall when things went wrong rather than the frequency, a path from ten percent rising to fifty did best.
The mechanism is not mysterious once stated. A conservative allocation at the start protects the portfolio through the window where sequence risk is worst. Rising later reintroduces equities for the part of the horizon where there is time for them to work. And the average equity exposure across the whole retirement is lower than a static allocation that performs worse, which is the part that makes it interesting rather than merely contrarian.
The evidence pointing the other way
A framework that stops there is advocacy.
Estrada ran the same question across nineteen countries plus the world market, over 110 years, using rolling thirty year retirements rather than simulation. The international evidence came out the other way: declining paths had substantially lower failure rates than rising ones, and left larger bequests.
His conclusion is the opposite instruction, to reduce equity exposure gradually through retirement. And he adds a third finding that deserves as much attention as the disagreement: a static sixty forty allocation beat both dynamic approaches across that sample, on the strength of being simple and robust rather than optimal.
What to do with two credible answers
Not average them.
The two studies differ in method, in sample and in what they treat as failure, and each is defensible on its own terms. Anyone who tells you the question is settled has read one of them. The useful position is narrower than either headline:
The years immediately around the start of drawdown are the ones that decide the outcome, and both bodies of work agree on that even where they disagree about what to do next. Whatever the path, that is the window where a mistake is expensive and where holding something that has not fallen matters, which is what what bonds are for is actually about.
A static allocation is not the naive option. It is a serious contender that beat both dynamic strategies in the wider dataset, and it has the enormous practical advantage of being followable.
A path you will not execute is worse than a simpler one you will. The rising path asks you to buy equities after a bad decade, in your seventies, which is precisely the trade the behaviour gap says people do not make. Deciding this in advance, in writing, is the only version that survives, which is what an investment policy statement exists for.
The part the glide path never sees
All of this describes the liquid portfolio, and for most readers of this site the liquid portfolio is not the largest holding.
Somebody with an apartment, a salary in the same city and savings in a fund has an allocation the glide path does not touch and cannot fix. Gliding the fund from seventy percent equity to thirty while the property sits unchanged is a small adjustment to a small part of the balance sheet, presented as a decision about risk.
The prior question is allocation by horizon across everything owned, and the honest answer for most people is that the concentration limits conversation matters more than the glide path one.
The arithmetic
Where it breaks
- Treating the rising glide path as settled. It is one well constructed result that a second well constructed result, using a longer and wider dataset, contradicts. Anyone presenting either finding without the other is presenting half of an open question as a conclusion.
- Assuming a target date fund's path was designed for you. Those paths are built for a median investor in the fund's home country, with an assumed retirement age, an assumed state pension behind them and an assumed currency of spending. Change any of those and the path is answering a different question.
- Following a rising path without asking whether you could actually execute it. It requires buying equities after a decade that went badly, at the point in life when a loss is least recoverable, which is the exact behaviour the evidence on investor conduct says people do not manage.
- Reading the age rule as a rule about age. What decides the right bond allocation is the date and currency of the liability being funded rather than the number of birthdays, which is why the same age produces different answers for someone with a pension and someone without one.
- Gliding the whole balance sheet on the strength of the liquid portfolio. A retiree whose largest asset is a property has an allocation that no glide path is touching, and moving the funds around while the concentration sits outside them addresses the smaller problem.
When to use it
When setting or reviewing the allocation for a portfolio that will be drawn on, and when a target date fund is being chosen on its date rather than on its path. The question is most valuable in the decade before drawdown starts, because that is when the decisions are still available.
Sources
- Wade Pfau and Michael Kitces, Reducing Retirement Risk with a Rising Equity Glide-Path
- Financial Planning Association, Reducing Retirement Risk with a Rising Equity Glide Path
- Javier Estrada, The Retirement Glidepath, An International Perspective
- Morningstar, what is a safe retirement withdrawal rate
Last reviewed . Educational research, not personal advice. Disclosure standards.