Developing a glide path is a very important part of any long-term investment strategy. You want to have a plan to help you govern each investment decision that you make over the years. Here are the basics of developing a glide path and what it can do for your portfolio.

Glide Path

The term "glide path" refers to a plan that is developed in order to help you determine your asset allocation mix over the years. With a glide path, you will set a target date when you want to reach a certain goal through investing. For example, you might be saving for a down payment on a house or investing for your retirement. Regardless of what you are trying to attain, the glide path will help you determine the best way to get there. 

Asset Allocation

The main component of a glide path is the asset allocation formula that it helps you develop. With this formula, you will change your asset allocation as you get closer to your investment goal. Most people that have a long-term time horizon for an investment will start out by investing mainly in stocks. By investing in stocks early on in the process, you have a better chance of accumulating funds quicker. Since stocks have a great potential for growth, they are relied on heavily during the early years of the investment cycle.

As you get further in the process, you will slowly start to get away from a majority of stocks in your portfolio. It is at this time that fixed income securities such as corporate bonds are introduced to the portfolio. The glide path will help you determine at what time you introduce these securities and at what percentage of the portfolio. Many times, investors will utilize a 60-40 split of stocks and bonds. This will still allow them to generate growth through stocks and receive a regular income from the bonds.

Once you get closer to the goal, your asset allocation will continue to become more conservative. You will then invest in a majority of fixed income securities and the money market. Most people that are close to retirement have very little of their portfolio invested in stocks. Instead, they prefer the security that bonds and the money market provide. They can also still receive some type of a regular return on their investment without taking on too much risk.

Target Date Funds

One type of investment that utilizes the glide path concept well is the target date fund. These types of funds are extremely popular for those investing for retirement. With the target date fund, you will be able to choose an approximate date that you would like to retire. You will then continue investing in the fund over the years on a regular basis. The fund will automatically change the asset allocation to become more conservative as you get closer to retirement. This type of fund can help you automate the process of developing your own glide path.

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