Glidepath Investing

The September 2012 issue of Fundamentals, a newsletter of Research Affiliates, addresses the question of glidepath investing, or the systematic adjustment of asset allocation during a person's lifecycle.  Conventional wisdom suggests that an aggressive allocation early in a person's working years gradually becoming more conservative is a prudent course.

Research Affiliates conducted a study comparing the conventional strategy (80/20 to 20/80 glidepath) to a constant 50/50 and a reverse of the conventional wisdom (20/80 to 80/20).  Using data from 141 years of capital markets returns, RA found that the reverse of the conventional strategy would provide for higher wealth at retirement, and that, even though the standard deviation of terminal wealth was higher, the worst case wealth measure was also higher than that of the conventional strategy.

RA correctly attributes the increased wealth to having the largest portfolio invested in the most aggressive allocation.  This will also place a larger investment pool at risk.  RA dismisses this: "(The reverse conventional investor) has to accept more uncertainty late in life as to how much she can spend in retirement—but it’s upside uncertainty!"

If all of this were true, no glidepath would be warranted; an investor maintaining an 80/20 portfolio throughout his career would undoubtedly retire with a superior retirement fund, and the worst potential outcome would most likely be higher than any of the others studied.

So what's missing?  The study is conducted only from the perspective of the twenty-year-old just starting his career.  If that was the only time that a strategy could be set, the study would be valid.  However, investors lifestyles, risk tolerances, and objectives change many times over their lifetimes, and it is imperative to change policies and strategies to reflect the new circumstances.  As these new strategies are adopted, I woulds expect that over time, they will come to resemble the conventional glidepath investing strategy that RA is attempting to discredit.

Update (10/3/12): Financial Advisor carries a story on Folio Investing's Steven Wallman's response to RA analysis.