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What is the sliding path?

Oct 29, 2020 07:05:19 AM

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What is the sliding path?
Hover path refers to a formula that specifies the asset allocation mix of the target date fund, based on the number of years until the target date. The sliding path creates an asset allocation that usually becomes more conservative (i.e. includes more fixed-income assets and fewer stocks) as the fund approaches the target date.
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How does the glide track work
Each family of target date funds has a different sliding path, which determines how the asset mix will change as the target date approaches. Some of them have a steeper trajectory, and have become significantly more conservative a few years before the target date. Others take a more incremental approach.

The mix of assets on the target date could also be very different. Some target date funds assume that the investor wants a high degree of security and liquidity because he may use the funds to purchase an annuity. Other target date funds assume that the investor is holding funds and thus includes more shares in the asset mix, reflecting a longer time horizon.
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Target date funds are becoming popular among those saving for retirement. It is based on the simple premise that the younger the investor, the greater the time horizon available to him or her before retirement, and the greater the risk he can take to increase the potential returns. A young investor's portfolio, for example, should mostly contain stocks. In contrast, an older investor might have a more conservative portfolio, with fewer shares and more fixed income investments.

Types of glide tracks
Regression regression path
An investor who uses the declining declining path gradually reduces his equity allocation every year nearing retirement. For example, at the age of 50, an investor who owns 40% of the shares in his or her portfolio may reduce his allocation of shares by 1% each year. They then increase their allocations for safer assets, such as Treasury bills.
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Hard glide track
A clipboard that uses a fixed regression path maintains the same customizations. For example, an investor may own 65% of shares and 35% of bonds. If these provisions are deviated due to price changes in assets, the portfolio is rebalanced.
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Sliding track height
Portfolios that use this approach initially have a larger allocation of bonds compared to equities. Equity allocation increases as the bond matures, as long as the stocks in the portfolio do not depreciate. For example, an investor's portfolio might start allocating 70% of bonds and 30% of shares. After a large portion of the bond matures, the portfolio may own 60% of the shares and 40% of the bonds.


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