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How do glide paths help you realise your goals linked to equity investments?
Equity by nature is volatile. How can we ensure this volatility doesn’t affect us when it’s time to
withdraw from equity to meet our long term goals? The answer lies in glide paths.
How do glide paths help you realise your goals linked to equity investments?
In a take-off or landing, the pilot smoothly changes the speed and the incline of the flight to avoid
mishaps.
Similarly, while building portfolios for retirement and other financial goals, financial advisors might
need to tweak asset allocations over the course of an investor’s journey to ensure their goals are
met without setbacks.
Asset allocation is an important contributor to investment portfolio returns. However, it need not
necessarily be a static one.
It is important to set the context of how your asset allocation would look now and in the future and
that’s where the glided path approach plays an important role.
So equity glide path refers to strategic shifts that one makes in the equity composition of one’s
portfolio over a period of time.
So, investors need to shift asset allocation over time in a way that balances risk vis-à-vis returns and
achieves their investment objectives. By doing this, investors also avoid sequence risk – the danger
of timing of the withdrawals affecting the investor’s return.
A 30-year old retiring at 60 years has an investment horizon of 30 years. And such a long period of
time gives her the elbow room to take higher exposure to equity and even out any interim volatility.
So, typically she starts with 80-100% equity exposure. However, on reaching her 50s, the equity
component is gradually scaled down to say 40-50% of the portfolio by the time of retirement.
This is done systematically by selling equities every year and reinvesting them in more stable
instruments like bonds.
Typically, it is done by keeping equity exposure constant for the initial 10-15 years and later scaling it
down. It can be a gradual shift or a steeper curve at the fag end (in order to safeguard your
portfolio). The exact quantum of shift depends on many factors including your financial situation.
Sometimes, ESOPs become a big chunk of one’s investment portfolio. Over a period of time, you
might want to diversify your equity holdings while keeping the equity mix constant.
Equity and fixed income come in many flavours; in equity, you have large-cap, mid-cap and small-
cap. And in fixed income, you have debt funds with varying durations or based on types of
underlying bonds and instruments.
So, while tweaking asset allocations and derisking, for instance, investors should also ensure the
underlying asset class under the hood of the glide path shifts accordingly.
Similarly, allocation to alternative assets can also offset the correlation between primary asset
classes by providing risk mitigation in times of a downturn.
Takeaway
A glide path with relation to equity is a popular strategy to shift asset allocation over time in a way
that balances risk vis-à-vis portfolio growth and achieves one’s investment objectives. Use it to
smoothen your investment journey.