Designing Glide Paths for Target-Date Fund Allocation
Summary
The document outlines ways to set the changing asset allocation, or glide path, of a target-date fund. One approach uses an investor’s human capital and forecasts of future asset returns to choose a path that maximizes investor utility. Another bases the path on how the relative risks of stocks and bonds vary across holding periods.
Its central rationale is that a longer horizon can make stocks less risky relative to bonds over the holding period; given their higher expected return, stocks may therefore receive a larger allocation farther from the target date. As the target approaches, the allocation can change with the horizon. The source provides a short summary rather than the underlying research paper, data, assumptions, or model details. It does not quantify the proposed risk relationship or specify a single recommended glide path, so the ideas are conceptual rather than a fully testable allocation rule.
Key ideas
- A target-date fund's glide path defines how its asset allocation changes over time.
- One design approach maximizes investor utility using human capital and expected asset returns.
- A second approach considers how stock and bond risks differ across investment horizons.
- The summary suggests higher stock weights when the target date is farther away.
- The underlying paper and its assumptions or empirical evidence are not included.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.