Risk & Allocation
A glidepath moves the allocation on a calendar, not on a view
Dated funds reduce risk according to a schedule set at launch. That is their whole strength and the source of every objection to them.
There is a short answer about glidepaths and dated funds and a useful one, and they are not the same. What follows is the useful one.
The short version
- The schedule is published in advance and runs regardless of conditions.
- Funds designed to a date and through a date end up very differently.
- Age is the only input, so identical people with different circumstances get identical allocations.
What a glidepath is
A glidepath is a published schedule reducing the growth allocation as a target date approaches, executed automatically inside the fund. The reduction happens regardless of market conditions, valuations or anything else, and that mechanical quality is the entire point. It removes a decision that most people either postpone indefinitely or make in reaction to whatever happened recently.
The schedule is set at launch and published, so what will happen and when is knowable well in advance. These funds are the default in many workplace schemes, which means a great many people hold one without having chosen it.
The reasoning behind reducing risk over time
A shorter remaining horizon leaves less time to recover from a fall, which is the main argument for reducing exposure near a date. Human capital also declines as a career progresses, removing the bond-like asset that supported a higher financial allocation earlier on. The portfolio grows over time, so the same percentage fall represents a very much larger sum later in life.
These arguments are reasonable and they do not produce a single correct schedule, which is why providers differ substantially. The differences are large enough that two funds sharing a target year can hold noticeably different allocations.
The objections
A schedule based only on age ignores everything else, including other assets, guaranteed income and actual capacity for loss. Two people of the same age with entirely different circumstances receive exactly the same allocation.
Reducing risk at a fixed date can also mean selling growth assets after a fall purely because the calendar said so. Retirement is not a cliff, and money that will be spent across thirty subsequent years arguably still has a long horizon. Some funds glide to a landing point and stop while others keep reducing through retirement, and that difference matters enormously.
To the date or through it
A fund designed to the target date reaches its most conservative allocation at that date and then holds there. A fund designed through the target date keeps adjusting for years afterwards, on the reasoning that spending is spread across decades. These two designs produce very different allocations at the retirement date itself, starting from the same stated target year.
On an ordinary week, the distinction is disclosed and is among the least-read pieces of information about a fund somebody may hold for forty years.
Neither approach is correct, and which suits depends on other income, other assets and how the money will actually be drawn.
When the date turns out to be wrong
People choose the fund matching their expected retirement year, and that year changes for a great many of them. A change of plan means the glidepath is targeting the wrong date and adjusting on a schedule that no longer applies. Switching to a different target year is usually possible and is one of the very few maintenance tasks these funds require.
The date should reflect when the money will be needed rather than when you expect to stop working, and those can differ. Checking that the fund year still matches the plan is a reasonable item to include in the annual review.
Adjust the size of it until it is something you would actually do tired.
Who they suit
They suit anybody who would otherwise never rebalance and never reduce risk, which is a very large group of people. They suit somebody with one main pot and no unusual circumstances far better than somebody with assets scattered across several places.
They are less suitable where a large part of the balance sheet sits outside the fund and pulls in another direction. Charges vary, and a glidepath is not worth paying a great deal extra for when the same effect can be arranged manually. Whether one fits your own circumstances is precisely the kind of question regulated advice exists to answer.
The takeaway
The schedule is the product. Read it once, and check the year still matches the plan.
The version you keep doing is the version that works.
Questions readers ask
Is a target date fund a good default?
For somebody who would otherwise never adjust anything, it does a job that would not otherwise get done. It is weaker where a lot of your wealth sits outside it.
What does to versus through mean?
Whether the fund stops adjusting at the target date or continues reducing risk for years afterwards. The two produce quite different allocations on the day you retire.
