False perceptions about the glidepath

Rob Arnott never set out to be a financial iconoclast, but he does believe the industry should overturn current approaches whenever empirical evidence proves them misguided

Rob Arnott
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False perceptions about the glidepath

Rob Arnott never set out to be a financial iconoclast, but he does believe the industry should overturn current approaches whenever empirical evidence proves them misguided

Rob Arnott

It pays to test conventional wisdom, as the premises on which it is based often amount more to hearsay than proven facts – as in the case of glidepath investing.

Embodied in target date fund (TDF) products, glidepath investing starts young employees with a heavy equitycentric portfolio and slowly ramps up their bond holdings as they age. At first glance, such an approach makes intuitive sense.

Young adults should be more aggressive and buy stocks: they have modest savings and decades to recover losses suffered from any bear markets they encounter. Conversely, mature adults approaching retirement should be more cautious and favor bonds: they have more wealth to lose and less time to recover from bear markets. They should therefore be wary of compromising their prospective retirement income.


In the US, we have built a trillion-dollar retirement-planning industry based on the notion that this glidepath will provide a smooth line of descent to the ultimate destination. Yet, although decades of advice back this approach, it is surprising that the underlying assumptions had never been proven. When my colleagues and I at Research Affiliates put the glidepath approach to the acid test in, we found the typical implementation failed to solve the basic problems facing most investors because it turns out that the premises are flawed. The core assumption is that glidepaths give investors more end-point wealth and less uncertainty compared with alternative strategies when it comes to estimating retirement income during the later years of wealth accumulation. Unfortunately, the implementation falls short on both counts, as our simulation revealed.

We examined how three different strategies would have worked, assuming a consistent real (inflation- adjusted) $1,000 annual contribution over a 41-year career and annual rebalancing. The simulation ignored both taxes and transaction costs. The three strategies were a glidepath that ramped down from an 80/20 stock-bond allocation to a 20/80 bond-centric allocation; a balanced approach rebalanced annually to a static 50/50 stock-bond allocation; and an inverse glidepath that started with a 20/80 stock-bond allocation and ramped up to an 80/20 equity-centric allocation.

Our research, based on 141 years of stock and bond returns from 1871 to, showed that the typical glidepath resulted in lower retirement assets than the balanced or inverse glidepath approaches, even for the extreme bottom tail of the distribution. Consequently, the glidepath approach failed to provide high-ending real annuities. Shockingly, it failed to provide greater confidence about our prospective retirement income even 10 years out from retirement. Detailed in The Glidepath Illusion … and Potential Solutions and published in the Journal of Retirement, our research should have been a revelation for the industry.

Later validated on a global scale by Javier Estrada, it showed that you ended up wealthier if you started defensively and finished aggressively. You also experience less downside risk if you did the opposite of conventional wisdom.

We are not suggesting that people should go into retirement, stop working and still be overwhelmingly equity-centric. We do suggest, though, that as people age, it is more profitable to be equity-centric when you have more money and less equity-centric when you have less. This is because a larger asset base invested more aggressively matters more than a small asset base invested aggressively.

This conforms with finance theory in an interesting way. Famous professors often assert the untested theory that you ought to invest more in stocks when you are young because your personal labor capital, that is, your life-cycle earnings potential, looks like a bond. If your life-cycle earnings potential looks like a bond, then to diversify your assets you ought to be investing in equities. As you wind down towards retirement and your earnings potential diminishes, you ought to have more bonds in your portfolio.

This would hold true if wages looked like a bond coupon, but they do not. Wages go up and down with the macro economy like stocks. Wages can end in a recession like stocks. They do not behave like bonds. So if your lifetime earnings potential looks more like a stock, then finance theory would actually say that for diversification you need more bonds when you are young and more stocks when you are older.


In our research, we identified four factors that contributed to glidepath design failures. These are inefficient asset class exposure, misspecification of risk and return, poor diversification and constant risk premium assumptions. These flaws are explained within our white paper and other investigations on the subject. One aspect includes how forcing the young to adopt a “risk on” posture is a poor match for their personal risk tolerance and job security and the negative impact this has throughout their lives.

One of the suggestions we have made to improve the glidepath was for younger workers to invest into a safer “starter portfolio” within their DC plan. Only when the relatively safe funds reach a comfortable level should investors consider taking more risk in the hope of generating excess return. And they should take that higher level of risk only on the portion of their portfolio that exceeds the starter portfolio’s minimum balance.

Conventional wisdom is not easy to overturn, but it is clear from our research that standard glidepath approaches are failing to deliver the full potential of these products. As investment managers we have a high calling to improve outcomes for investors in what is likely to be a difficult future, especially as the immense baby boomer generation retires and begins to transition from accumulating assets to depleting them. I firmly believe that retirees need a default, but that it is time for an evolution in glidepath products to offer a stronger solution for the retirement problem.

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